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MAGE, Shane Henry, 1933-
THE "LAW OF THE FALLING TENDENCY OF
THE RATE OF PROFIT": ITS PLACE IN THE
MARXIAN THEORETICAL SYSTEM AND RELE-
VANCE TO THE U.S. ECONOMY.

Columbia University, Ph.D., 1963
Economics, theory

University Microfilms, Inc., Ann Arbor, Michigan

TEE "IA¥ OF TEE FALUWG TENDENCY OP THE RATE OP PROFIT":
ITS PIACE IN THE MARXIAN THEORETICAL SYSTEM AND REIEVANCE

TO THE U,S, ECONOMY

by
Shane Hage

Submitted in partial fulfil3jnent

of the requirements for the degree of

Doctor of Philosophy

in the Faculty of Political Science

Columbia University

1963

ABSTRACT
THE "LAW OP THE PALLING TEI\IDENCY OP THE RATE OP
PROPIT" : ITS PLACE IN THE MARXIAN THEORETICAL
SYSTEM AND RELEVANCE TO THE U.Se ECONOIvIY

Shane Mage

The concept of a falling rate of profit occupies
a crucial position in Marx's theory of economic develop-
ment: it is, he declared J the economic mechanism whereby
capitalism ultimately blocks its own growth and thus proves
that it must give way to a higher social order.

This "law" has in the past been criticized on .two
main grounds: It was alleged that Marx's theoretical
derivation of a falling tendency of the rate of profit
from a rising tendency of the "organic composition of
capital" (the capital -labor ratio) fails to show why the
rate of profit cannot permanently be maintained through a
rising tendency of the "rate of exploitation" (the relative
share of the national income going to capital) and why the
organic composition of capital should itself tend to
increase. It was argued, moreover, that the predictions of
a falling rate of profit, and especially of a rising
organic composition of capital, as formulated by Marx, have
not been borne out by empirical data from the U.S. economy.

The present study tests Marx's "law" both on
theoretical and empirical grounds.

The theoretical discussion involves stating or
restating the basic categories of Marx's system in a way
which establishes both their coherence with each other and
their identifiability to empirically knowable economic
magnitudes o This analysis involves examination of: (a)
Marx's implicit and explicit treatment of certain contro-
versial bvit vital questions, such as the predicted
historical tendency of the real wage and the definition and
treatment of "unproductive" labor; (b) Similarities and
differences between Marxian and non-Marxian treatments of
the central topic; (c) The inter-relationships among the
various sections of the Marxian system*

It is argued in conclusion that the "law of the
falling tendency of the rate of profit" has theoretical
validity both as a vital part of Marx's model of economic
development under capitalism and as a logically correct
and necessary deduction from the basic premises of the
Marxian s3''stemo

The empirical test of the "law" covered the U.S.
non-farm private business economy for the period 1900-1960o
All computations were made twice, on the basis of two
different systems of measurement: (a) Capital stock and
capital consumption expressed for each year in current
dollars through deflation of original cost; (b) Capital
stock and capital con3^amption expressed throughout in

terms of the basic quantitative unit of the Marxian system,
the hour of "socially necessary labor."

The data indicate that the Marxian rate of profit
for the U.So, \Tfhether calculated on a labor-unit or
current-dollar basis, has fallen drastically over the past
sixty years, and that the organic composition of capital
has simultaneously increased, though not in as large a
way. At the same time these data indicate another major
tendency which Marx did not predict and which contradicts
his anticipations J a substantial long-term decline in the
rate of exploitation, sufficiently pronounced to account
for two-thirds of the observed fall in the Marxian rate
of profit.

Nevertheless, despite the invalidation of certain
major Marxian predictions, Marx is confirmed on the issues
he regarded as decisive: the rising tendency of the
organic composition of capital and the falling tendency
of the rate of profit©

TABLE OP COKTEKTS

Page

GLOSSARY OF TERFiS kW RELATIONSHIPS . , v

INTRODUCTION 1

Chapter

T. THE FUroAJffilWAL CATEGORIES OP THE

MRXIAN SYSTEM 6

II. BASIC Q,UA1\T?ITATIVE RELATIONSHIPS 36

III. THE LAW OP THE PALLING TENDENCY OP THE

RATE OP PRO PIT AS PRESEMED BY IvIARX 81

TV. COMPARISON OP MAPJCIAN AND I^ION-MARXIAN

TPIEDRIES OP A PALLING RATE OP PRO PIT Ill

V . THEOPlETICAL CRITICISillS OP THE UM 140

VI. CALCULATION OP THE Iv!ARXIAN RATE OP PRO PIT,
RATE OP SURPLUS -VALUE, AND ORGASTIC
COMPOSITION OP CAPITAL: THE UNITED
STATES, 1900-1960, (CURPiEIW DOLLARS) 161

VII. CALCULATION OP THE MAPXCAN RATE OP PROFIT,
RATE OP SURPLUS -VALUE, ORGANIC COMPO-
SITION OP CAPITAL, Al© NET PRODUCTIVITY
OP LABOR: THE UI^TED STATES, 1900-
1960, (LABOR-VALUE UNITS ) 196

VIII. CONCLUSIONS <■ 220

Appendices

A. ANALYSIS OP THE BORTiaB'lICZ-SV/'EEZY
CRITICISM OP IviAPJC'S SOLUTION TO THE
"TRANSFORMATION PROBLEM" 233

B. TABLES SUPPLEI'ffilWARY TO CHAPTER VI 246

C . TABLES SUPPLEMENTARY TO CHAPTER VII 261

D . TABLES SUPPLEMENTARY TO CHAPTER VIII 266

BIBLIOGRAPFY , 276

Ill

LIST OP ILLUSTRATIONS

Page

Chart

Vl-le Rate of Profit and Organic

Composition of Capital, 1900-1960,

(Current Dollar Basis) ..co o.o IVS

VI-2o Rate of Profit and Rate of
Surplus -Value, 1900-1960,
(Current Dollar Basis ) » » o « o • 1"5

VII-1. Rate of Profit and Organic

Composition of Capital, 1900-1960,

(Labor-Unit Basis) o .......*.. ...» 204

VII-2, Rate of Profit and Rate of
Surplus -Value, 1900-1960,
(Labor-Unit Basis) «..o...». o 205

VII-3e Organic Composition of Capital,

Selected Years, 1900-1960 » ».. 206

VII-4. Labor Productivity and Organic

Composition of Capital, Selected

Years, 1900-1960 »• 207

D=l. Expanded (Gross of Taxes) and
Actual (Net of Taxes) Rates of
Profit and Surplus -Value, 1900-1960,

(Labor-Unit Basis ) oeeo.eoee.e.e.o. »«••.•»•» '^ '^

D-2. Expanded (Gross of Taxes) and
Actual (Net of Taxes) Rates of
Profit, Peacetime Peak Years
1905-1960, (Labor-Unit Basis) oeee<.«o 275

LIST OF TABLES

Table

VI-1. Fundamental Ratios, 1900-1960,

(Current Dollar Basis) o »•'» ^^'^

VII-l.o Fundamental Ratios, 1900-1960,

(Labor -Unit Basis) ....« o... 208

B-I. Price Index Used in

Ciorrent Dollar Computations ««***•»«« »» ^-i

Table -Page

B-IIo Capital Stock, 1900-1960,

(Current Dollar Basis) *o.*eao«*e» so. 248

B-IIIo Capital Consumption, 1900-1960,

(Current Dollar Basis) o 250

B-IVs Corporate Gross Surplus -Value, 1900-

1960, (Ciirrent Dollar Basis) 252

B-Vo Unincorporated Business Gross Surplus-
Value, 1900-1960, (Current
Dollar Basis ) . . . <, ^ « . <, . o 254

B-VIe Pre -Tax, Gross, and Net

Surplus -Value, 1900-1960,
(Ciu'rent Dollar Basis) .««<>•«•..... 256

B-VII, Gross and Net Variable-
Capital, 1900-1960,^
(Current Dollar Basis) s.eseo*ao*«*«o<>**»*»* 258

C-Io Man-hours of Productive

Labor, 1900-1960 o.... 262

C-II. Capital Stock, Capital Consumption,
and Labor Content of the Current
Dollar, 1900-1960, (Labor-
Unit Basis) • 264

D-I. Productivity and Wage

Indexes, 1900-1960 o.^ » « 267

D-IIo Rates of Increase of Net-
Productivity and Hourly Roal-ViTages »»..*..•• 269

D-III. Capitalist Sector Gross Product, 1900-

1960, (Current Dollar Basis) «•« o.ooo 270

D-r/. Expanded (Gross of Taxes) Rates of

Profit and Surplus -Value, 1900-1960,

(Labor=Unit Basis ) »ss5o. •»».••••••»••»•«••• 272

GLOSSARY OF TER11S kW RELATIONSHIPS

Value: The value of the product of a capitalistic
economy is a term used by Marx in two senses; net value
and gross value *

Ho) Wet Value (Y) : The net value of the annual
product is determined by the input of productive labor
required for its production, defined quantitatively as the
niimber of hours worked by production and production-
related workers. The flow of net value is identical to the
sum of the following two flows :

- Variable Capital (v) : the wage-cost of
production and production-related labor input.

- S-ur plus -value (s) : total non-labor factor net
income o

Y s v+s

bo) gross Value (P) : The ' gross value cT -the
annual product is the sum of its net value plus an
additional flow:

- Constant Capital (c) : the sum of overhead costs
(exclusive of property compensation) and capital con-
sumption, (N.B. Despite its appelation, this must always
be recognized as a flow*)

P s Y+-C

Monetary flows can be converted into value flows
through the implicit value -content of the price iinit given
by the ratio of the net value (Y) to the money net income

of productive laborers and proprietors of other factors
of production.

Capital Stock (C ) : Capital is the value, net of
depreciation, of the stock of privately owned productive
resources used by capitalistic enterprises o

Productivity of Labor ? Like value, labor-
productivity has both a p:ross and a net sense;

^•) Gross Productivity : Gross labor-productivity
is given by total real output per unit of productive -
labor inputs

be) Net Productivity of Labor (IT) ; The net
productivity of labor is the ratio of the real income of
productive laborers and proprietors of other factors of
production to productive-labor input. The net productivity
of labor is equal to its gross productivity multiplied by
the ratio of net value to gross value.

Organic Composition of Ca pital (Q) : The organic
composition of capital signifies capital per worker - i.e.,
the ratio between the capital stock and productive-labor
input o Q = - The iroinerical value of this quantity depends

on the time period over which the flow Y is measured, and
can be thought of as the number of production-periods em-
bodied in the capital stock. This ratio, which is expressed
in units of labor-value, ultimately, according to Marx, re-
flects the technologically determined ratio of real capital
(in "physical" units) to labor input (which latter ratio is
termed by Marx the "technical composition of capital,")

Vll

Rate of Surplus -Value (sM ; The rate of surplus -

value is the ratio between the flows surplus -value and

variable capital, s ' = £ This ratio is determined by

the ratio of the net productivity of labor to the real wage,
f±l ( = 1 -V - _ i-Vs») . Given the total number of*^ hours of
productive labor performed, the rate of surplus -value de-
termines the quantity of surplus -value : s=:Y-v=:Y--^

- — r" = Y (-1! — )

The Rate of Profit (^J.) : The Marxian rate of

profit is the average net rate of return on investment in

capitalistic enterprises; the ratio of surplus-value to the

capital stock, p' - £ This rate is determined by the

relationship between the rate of surplus-value and the

organic composition of capital:

s _ ^^1+ s'^ s\

C " YQ - Q(l-ts')

Falling Tendency of the Rate of Profit ; The incre-
mental rate of profit, ^, (equivalent to the marginal
efficiency of investment,) is the increase in aggregate
property income per additional unit of net investment e Marx
contends that all net investment tends to augment capital
per man. If the rate of surplus -value is fixed (i.e., if
productivity and the real wage change in the same proportion)
the accumulation of capital must therefore produce a falling
rate of profit, since a£l -. sj

INTRODUCTION

The orthodox economists have been much
preoccupied with elegant elaborations
of minor problems, which distract the
attention of their pupils from the
uncongenial realities of the modern
world, and the development of abstract
argument has run far ahead of any
possibility of empirical verification.
Mars^s Intellectual tools are far cruder,
but his sense of reality ie far stronger,
and his argument tovrers above their in-
tricate conatruotions in rough and gloomy
grandeur. n

Joan Robinson, An Essay on Marxian Economics e'

The "law of the failing tendency of the rate
of profit" occupies a decisive position in the theoretical
structure developed, primarily in the three volumes of
Capital a by Karl I-Iarx«

For Marx the crucial character of this "law" is

a consequence of the central proposition of "historical

roaterialiam'" « that every socio-economic system oomes

into being in order to further the development of the

productive forces, and is replaced by a different and

higher system oniv when it ceases to be able to fulfill

this taska i

Kc social order ever disappears before
all the productive forces, for which
there is robm in it, have been developed.

P, 2,

and new hleher relations or production never
appear before the material conditions of
their existence have matured in the vomb
of the old society."^

Marx and Engels characterized their social program

as scientific socialism because it vas based, not on a

moral criticism of capitalism, but on what they claimed

to be the actual laws governing capitalist development:

. . . large scale industry, as it develops
more fully, comes into conflict with the
barriers within which the capitalist mode
of production holds it confined. , . . Modern
socialism is nothing but the reflex in thought
of this actual conflict.^

The falling tendency of the profit-rate, accord-
ing to Marx is the actual economic mechanism whereby a
capitalist economy ultimately blocks its own growth and
thereby proves that it must give way to a higher order:

The barrier of the capitalist mode of production
becomes apparent:

1. In the fact that the development of the
productive power of labor creates in the falling
rate of profit a law which turns into an
antagonism of this mode of production at a
certain point and requires for its defeat
periodic crises.

2. In the fact that the expansion or con-
traction of production is determined . . . - - •
by profit and by the proportion of this
profit to the employed capital, thus by a
definite rate of profit, rather than the
relation of production to social requirements,
i.e., to the requirements of socially developed
human beings. It is for this reason that the

1. Karl Marx, Critique of Political Economy (New York,
1904), p. 12.

2. Pried rich Engels, Antl-Duliring: (New York, 1939) ^ p. 293.

capitalist mode of production meets with
barriers at a certain expanded stage of
production which, from the other point of
view, would be altogether inadequate. It
comes to a standstill at a point determined
by the production and realization of profit,
not by the satisfaction of social needs.

The rate of profit is the motive power of
capitalist production, and things are pro-
duced only so long as they can be produced
with a profit. Hence the concern of the
English economists over the decline of the
rate of profit. That the bare possibility
of such a thing should worry Ricardo, shows
his profound understanding of the conditions
of capitalist production. The reproach moved
against him, that he is unconcerned about
"human beings" and has an eye solely for the
development of the productive forces, whatever
the cost in human beings and capital- v al ues -
it is precisely that which is the most im-
portant thine: aboutu.hlm. Development of the
productive forces of social labor is the his-
torical task and justification of capital.
It is precisely in this way that it uncon-
sciously creates the material requirements of
a higher mode of production. What worries
Ricardo is the fact that the rate of profit,
the stimulating principle of capitalist pro-
duction, the fundamental premise and driving
force of accumulation, should be endangered by
the develo-oment of production itself. And
here the quantitative proportion, means every-
thing. There is, indeed, something deeper be-
hind it, of which he is only vaguely aware.
It is here demonstrated in a pui-el^r economic
way, i.e., from the bourgeois poin-6. of view,
within the limitations of capitalist under-
standing, from the standpoint of capitalist
production itself, that it has a barrier,
that it is relative, that it is not an ab-
solute, but only a historical mode of produc-
tion corresponding to a definite and limited
epoch in the development of the material

conditions of production.-^

The validity of the "law of the falling tendency
of the rate of profit" is thus a question of the highest
interest for modern economists. The problem ¥ith which
Marx was most concerned, the pattern of economic growth
under a capitalist form of social organization, has in
the past generation become the foremost concern of
Western economic theory and practice, and "The Lagging
U.S. Growth Rate" is at this moment not only a subject
for discussion among academic economists^ "but even a
commonplace of political oratory.

Is Marx's law of the falling rate of profit rele-
vant to our c\irrent concerns? An answer to this question
must proceed from both the theoretical and the practical
side. The second part of thj.s study is devoted to a con-
frontation of Marx»s "law" with the data of 20th-Gentury
U.S. economic development. But before Marx's theory can
be tested by the facts of economic life it must pass a
prior test: it must be shown to be a correct and neces-
sary derivation from the basic premises postulated by

1. Karl Marx, Capital (Chicago, C. Kerr and Company, 1907-
1909), III, "^OS-SOS. All subsequent citations of the
English translation of Capital will refer to the Kerr
edition. The translations have sometimes been revised in
minor respects in light of the original text and the recent
English translation of Volumes II and III (Moscow, 1957 and
1959) .

2. A symposium with this title was held at the I96I con-
vention of the American Economic Association.

Marx, and it must be shomi to refer to economic reality
m such a way that its predictions can he refuted hy the
facts.

The first part of this study, accordingly, is
devoted to an analysis of the derivation and meaning of
the "law," and an examination of its validity in the
light of the major theoretical criticisms that have been
brought against it.

In the course of this analysis it has continually
been necessary to "interpret" Marx: i.e., to attempt re-
statement of his theories in a way that is not merely
consistent with his fundamental approach but above all
makes them meaningful in the context of modern economics
and of the contemporary economic system. My criterion
in this has not been exegesis but theoretical clarifica-
tion in the context of an empirical reality, and where
Marx is ambiguous or even contradictory I have sought to
interpret his meaning in as realistic a way as possible.
For this procedure I need offer no apology beyond the
words of Marx himself:

The question whether objective truth is an
attribute of human thought - is not a theo-
retical but a practical question. Man must
prove the truth, i.e., the reality and power,
the "this-sidedness" of his thinking in prac-
tice. The dispute over the reality or non-
reality of thinking that is isolated from
practice is a purely scholastic question, ■'•

1. Marx, Theses on Feuerbach . Thesis II, in Karl Marx and
Friedrich Engels, The German Ideolog:y (New York, 19^7),
p. 197.

CHAPTER I
THE FUNDAMENTAL CATEGORIES OF THE MARXIAN SYSTEM

In the preface to the first edition of Das
Ka-pital Marx stated his essential purpose in these words:
"It is the ultimate aim of this work to lay bare the
economic law of motion of modern society." He sought to
formulate a systematic and coherent scientific view of the
historical path of development of the capitalist economic
system from its origins to its hoped-for replacement hy a
socialist form of economic organization.

Marx's endeavor to determine "economic law" im-
posed on him the requirement that he carry out his project
in terms of economics. But his economic theory cannot be
understood exclusively within the confines of the economics
of capitalism. Its basis is a view of human nature and of
the historical growth of humanity, a view whose scope far
transcends analysis of the specifically capitalist econom-
ic system.

Human progress, according to Marx, consists in the
increase of man's power over natiire. This power is made
effective through the characteristically human process of
labor: the social organization of human beings to co-

1. Capital. I, 14.

operate in the control and exploitation of the nat-ural en-
vironment, to produce . Production, from the very dawn of
humanity, is carried on "by means of tools:

No sooner does labor undergo the least
development than it requires specially pre-
pared instruments. . . . The use and fabri-
cation of instruments of labor, although
existing in the germ among certain species
of animals, is specifically characteristic
of the human labor -process, and Franklin
therefore defines man as a tool- making
animal.^

These tools, and the techniques corresponding to

them, constitute, with nature, the productive forces

available to mankind at every given moment. They form

the basis for the mode of production, the social organi-
zation of the labor-process, which in turn determines the
total structure of the society:

In the social production which men carry
on they enter into definite relations that are
indispensable and independent of their will;
these relations of production correspond to a
definite stage of development of their material
powers of production. The sum total of these
relations of production constitutes the economic
structure of society - the real foundation, on
which rise legal and political superstructures
and to which correspond definite forms of social
consciousness. The mode of production in material
life determines the general character of the
social, sniritual, and political processes of
life. 2

Capitalist society is a historically determined

form of human society in general, and thus its central

1. Capital . I, 200.

2. Karl Marx, Critique of . Political Economy (New York:
1904), p. 11; hereafter cited as Critique .

featijre, in the historical-materialist view, is its social
organization of the labor -process. But whereas, in pre-
vious forms of society, "the social relations between in-
dividuals in the performance of their labor appear at all
events as their own mutual personal relations," under
capitalism these relationships are "disguised under the
shape of social relations between the products of labor."
The task of economics, according to Marx, is to penetrate
this disguise and show how "the vrealth of society [which]
under the capitalist system presents itself as an immense
accumulation of commodities" in its essential reality
expresses and is determined by the actual social relation-
ships among human beings.

Since these basic social relationships appear as
exchange relationships, relationships through which every
commodity is valued in terms of all others by means of its
money price, Marx takes the problem of " value " as his point
of depart-are. This problem was defined by Marx as the
relationship betwean the e xchange -process typical of a
capitalist society and the labor -process which he regards
as the kernel of all human societies:

even if there were no chapter on value in my
book, the analysis of the real relationships
which I give would contain the proof and
demonstration of the real value relation
the mass of products corresponding to the

e 3 e

1. Capital . I, 89.

2. Critique , p. 19.

different needs require different and
quantitatively determined masses of the
total labor of society. That this neces-
sity of distributing social labor in
definite proportions cannot be done away
with by the particular for m of social pro-
duction, but can only change the form it
assumes , is self -evident. No natural laws
can be done away with. \lha.t can change,
in changing historical circumstances, is
the form in which these laws operate. And
the form in which this proportional divi-
sion of labor operates, in a state of so-
ciety where the interconnection of social
labor is manifested in the private exchang e
of the individual products of labor, is
precisely the exchange -value of these pro-
ducts. The science consists precisely in
working out how the law of value operates.-^

Marx's response to this problem, the "labor theory
of value," starts with the postulate that the value of a
commodity consists of the portion of social labor al-
located by society to its production. As Joan Robinson
correctly remarks, this conception of value "is purely a
matter of definition. The value of a commodity consists
of the labor -time required to produce it, including the
labor-time required by subsidiary commodities which enter
into its production."

That "value" in this sense is something quite dif-
ferent from "utility" or "use-value" is obvious, Marx,
in declaring that to be a commodity every commodity must
both "satisfy human wants" and be a "product of labor,"

1. Karl Marx, Letter of II/7/I868 to Dr. Kugelman?i,ln
Karl Marx and Priedrich Engels, Selected Correspondence

(New York, 193^), p. 246. "

2. Joan Robinson, An Essay on Marxian Economics (London,
1952), p. 13.

merely repeats the basic distinction established by Smith
and RicardOe

Vftiat is ne-w in Marx's use of the term ''value" is
that he establishes a radical disjuncture between the
category of value and that of price , insofar as these
apply to individual commodities or groups of commodities o
One of his sharpest criticisms of the Ricardian value
theory is that Ricardo seeks to determine "relative
value" on the basis of the relative quantity of labor in
the commodities to be exchanged,

Ricardo 's error, according to Marx, is that since
in reality the "natural prices" at which commodities tend
in the long run to be exchanged are governed (under com-
petitive conditions) by "prices of production which are
not directly determined by the values of the commodities
o e . he should therefore hcive said: These average prices
of production are different from the values of the com-
modities. Instead of this he concludes that they are
identical • . . o"""- Thus Ricardo finds himself driven
toward an admission "that values are themselves determined
by influences independent of labor timeo"

All Individual money relationships, in Marx's
view, are necessarily characterized by this difference
between price and value ;

lo Karl Marx, Theories of Surplus Value (New York, 1952),
po 213, hereafter cited as Theories .

2o Ibid., p. 233e

Magnitude of value expresses a relation of
social production, it expresses the connection
that necessarily exists between a certain
article and the portion of the total labor -
time of society required to produce it. As
soon as magnitude of value is converted into
price, the above necessary relation takes the
shape of a more or less accidental exchange -
ratio between a single commodity and another,
the money commodity. . . . The possibility,
therefore, of quantitative incongruity between
price and magnitude of value, or the deviation
of the former from the latter, is inherent in
the price form itself. This is no defect, but,
on the contrary, admirably adapts the price
form to a mode of production whose inherent laws
impose themselves only as the mean of apparently
lawless irregularities that compensate one
another. •'•

The commodity, then, taken in itself, has two op-
posite characteristics: utility and price, use -value and
ex change -value . In Marx's Hegelian terminology the com-
modity's value constitutes the "identity" of these "opposites"
because as value it no longer appears as a thing in itself
but is now apprehended as the product of a definite amount
of social labor, (in the Hegelian dialectic onposites are
not to be thought of as the terms of a logical contradiction
or paradox but as poles of a dynamic logical -process . In
the case of the commodity, abstract utility, usefulness as
such, is the fundamental category, the initial pole. The
coat is produced as a coat. But when it enters the market
as a commodity offered for sale its seller regards it simply
as a sum of money to be realized by the sale - its utility

1. Capital . I, 11^.

has been negated, its form changed from use-value to ex-
change-value, though it remains a real coat all the time.
When it is bought by the final consumer it becomes an ob-
ject of utility again and loses its commodity form. Thus,
sale to the user is "negation of negation." This process
has given the category of use -value a new meaning, raised
it to a higher level than the original "utility" that was
abstracted from in the offer of the c-iat for sale. The
social process of sale has not merely provided the purchaser
vith a useful article - it has also influenced the alloca-
tion of social resources to the production of coats, and
thereby helped to determine the value of the subsequent
output of coats. Thus the Marxian category of value , despite
the opinion of a number of commentators,-^ is not derived
through abstraction from use -value but on th© contrary in-
volves use-value at least equally vith exchange -value. As
Engels'vrote (in 18431 ) " Value is the relation of -production
costs to utility ."^

1. Thus Hilferding wrote: "the natural (l) aspect of the
commodity, its use- value, lies outside the domain of politi-
cal economy," (B6hm-Bawerk ' s Criticism of Marx LNew York,
1949], p. 130). And Sweezy repeats: ''Marx excluded use-value
(or, as it would now be called, 'utility') from the field of
investigation of political economy." (Sweezy, Theory of
Capitalist Development [New York, 1942], p. 26). The in-
compatibility of these interpretations with Marx's actual
doctrine is thoroughly demonstrated in the essay by R. Rosdolsky,
"Der Gebrauchswert bei Karl Marx, Elne Kritik der Bisherlgen
Marx-Interpretation," Kvklos . XII, 29-53.

2. Friedrich Engels, Outlines of a Critique of Political
Economy , in Karl Marx, Economic and Philosophic Manuscripts
of 1844 (Moscow, 1959), p. 186.

Viewed pragmatically, the establishment of value
as a "higher" category than price reflects a division of
the subject matter of economics into different sets of
problems, for each of which different analytic tools are
required,

Marx, as ve have seen, recognizes the market as
the mechanism whereby society allocates its productive
resources among alternative uses. The analysis of exchange -
value is aimed at comprehending a price system whose function
is "to bring that quantity of commodities on the market
which social requirements demand; in other words, that
quantity of commodities whose market-value society can pay."-"-

These problems of short-run resoTorce allocation,
however, are not Marx's main concern. True, Chapter X of
the Third Volume of Das Kapital. "Market Prices and Market
Values," with its declaration that "the market-value is
always regulated by the commodity produced under the least
favorable circumstances, if the supply is too small, and by
the commodity produced under the most favorable conditions,
if the supply is too large, "^ leaves the door wide open for
development of a marginal-cost price theory. But Marx him-
self did not formulate any such theory.

For Marx's central purpose, elucidation of "the

1, Capital . Ill, 213.

2. Ibid .. Ill, 218.

economic law of motion of modern society," he needed in--
struments of analysis appropriate to the study of long-
term economic growth and of the division of the social
product among the basic social classes. In order to
measure and compare economic magnitudes over time he needed
to reduce relative prices, expressed in money, to a dimension
which could make them measurable in terms of a unit of
measure which would not itself vary over time o

As the unit of measure in which "social labor" is
to be quantified Marx postulates the unit of duration:
"The quantity of lahor is measured by its duration, and
labor-time finds its standard in weeks, days, and hours."
Marx thus defines value as a quantity of labor-time »

This definition of value does not start from the
"surface phenomena" of commodity-exchange: its starting
point is the labor-process in society as a whole. The Marxian
concept of value , accordingly, has meaning and can be under-
stood only in social terms. The primary category from which
all other economic quanta are derived by Marx is the aggre-
gate labor at the disposal of society. Viewed from the
angle of the individual producer, "the labor-time of a single
individual is directly expressed in exchange -value as uni-
versal labor-time, and this universal character of individual
labor is the manifestation of its social character." Sim-

1. Capital , I, 45.

2o -Marx, Critique , p. 26«

llarly-j starting from the relative ex change -value of oom-
modities in terms of each other, "their relativity by no
means consists only in the ratio in which they exchange for
each other, but in the ratio of all of them to this social
labor vhich is their substance."-^

"Social labor" consists in reality of the labor of
a vast number of different individuals, producing different
things with different uses» In this sense, as being always
at bottom the unique labor of ?. definite individual under
definite social conditions producing an object with a
definite utility, Marx calls it "concrete labor."

The formulation of an abstract unit of measxjre in
terms of labor-time requires abstraction from these dif-
ferences. In Hegelian terms, the category forming the
ground of the unit of measure consists of the "identity"
of the "opposites" abstract labor and concrete labor.
"Wliat this means is that the working- time of every indivi-
dual is viewed as a fraction of the total working time of
society.

Proceeding from this aggregate, Marx defines the
way in which labor -time can be made into an objective
unit of measure: the work of different individuals is
to be expressed as "socially necessary labor-time." As
Marx states it:

1. Marx, Theories , p. 210.

The total labor-power of society, which is
emhodled in the sum total of the values of
all commodities produced by that society,
counts here as one homogeneous mass of human
labor -power, composed though it be of in-
numeralDle individual units. Each of these
units is the same as any other, so far as
it has the character of the average labor -
power of society, and takes effect as such;
that is, so far as it requires for producing
a commodity no more time than is needed on
an average, no more than is socially necessary.
The labor-time socially necessary is that re-
quired to produce an article under the normal
conditions of production and with the average
degree of skill and intensity prevalent at
the time.

If qualitatively unlike, unique units of labor

are to be quantified this must be done in a dimension

objectively common to all of them, and all, necessarily,

posess duration, take place in a temporal universe. This

essential nature of Marx's category of "socially necessary

labor- time" as a term of measiirement, is well stated by

Naville:

It is time that remains the foundation of this
conception. In other words, society has at its
disposal a given mass of labor-power and of
labor- time, concretized in quanta having among
themselves a certain relationship of proportion-
ality. As a mass in activity, "abstract^' labor
can be conceived as an energetic substance
common to all labors. As a potential mass it
is to be conceived as a disposable time,
measurable in homogeneous units. But in one
as in the other case it can be considered in
its abstract, social form only in function of ^
its concrete forms. 2

1, Capital . I, 46.

2. Pierre Naville, De L' Alienation a la Joui ssaace (Paris,
1957),. p. 414.

The determination of "socially necessary labor-
time" thus Involves the transformation of a qualitatively
heterogeneous mass of different concrete labor-powers
into a homogeneous magnitude. The quanta of this magni-
tude are units of the "average labor-power of society,"
Consequently individual labor-powers of differing skill
stand in a quantitative as well as a qualitative rela-
tionship one to another: all can be expressed in terms
of this fundamental unit as it is manifested in the value
of the commodities produced; i.e., in time-units of
"simple, average, labor."

This Quantitative relationship^ by which the
labor of every worker differs, even if infinites imally,
from the labor of every other, is thus defined by Marx
as relative de\^iation from a "mean," "dsm gesellschaft-
lichen Durchschnittsgrad von Ges chick und Intensity t der
Arbeit."-^

"Simple, average, labor," in consequence, like
all Marx's categories, is properly viewed only as a
socially determined magnitude. It is the labor, not of
some standard, "unskilled," worker, but of the averae;e
worker, the laborer working with " the average degree of
skill and intensity ." An hour of the labor of this
"average" worker is the measure of "abstract labor," and

1. Karl Marx, Das Kapital (Wien, 1933-193^),- I, 5> cited
in translation, supra , p. l5o

thus the basic quantitative unit of the entire Marxian
system .

All the aspects of concrete labor must vary
continually, but this unit of abstract labor Is In-
variant to time, no matter how vastly the productivity
of concrete labor may increase: "However then produc-
tive pover may vary, the same labor, exercised during
equal periods of time, always yields equal amounts of
value. ""^ Historic changes in "the average degree of
skill and Intensity" itself are to be taken into account
as a factor Increasing the -productivity of labor and
consequently do not touch the unit of measure:

The value of a commodity would remain constant
if the labor-time required for its production
remained constant. But the latter changes with
every variation in the productiveness of labor.
This productiveness is determined by various
circumstances, amongst others, by the average
amount of skill of the workmen, the state of
science and the degree of its practical ap-
plication, the social organization of pro-
duction, the extent and capabilities of the
means of production, and by physical conditions. ^

By defining the unit of value as the hour of
socially necessary labor-time Marx establishes an empir-
ically utilisable standard of measurement, based on a
knowable quantity: the number of hours of labor performed
by productive workers in the course of the year. The way

1. Capital . I, 53.

2. Ibid ., p. 47.

in which it is to Toe used depends on a further definition:
the relationship of value to the units of money in which
a market-economy society conducts its economic activities.

This relationship is formulated by Marx by means
of an identity: money is "the phenomenal form that must
of necessity be assumed by that measure of value which
is inananent in commodities, labor-time."^ Conversely,
price is "value in the form of money." By definition,
therefore, the monetary unit of a given society at a
given time, whether it nominally consists of gold or of
inconvertible paper, represents a definite quantity of
value. It has a definite labor -content.

This fundamental term, the labor -content of the
price unit , is identically the ratio between two empirical-
ly determinable magnitudes, the sum of prices and the sum
of values of the commodities produced in the year. Equiv-
alent ly, it is the ratio between the money net income of
the laborers and capitalists and the number of hours of
productive , labor performed in the year.

Through this identity any economic quantity ex-
pressed in prices of a particular year is theoretically
convertible into value -units . Accordingly, the Marxian
theories concerning the division of the valu e of the
social product among the classes and the proportions

1. Capital . I, 101.
2= Ibid. , III, 227.

between the value nevly created and the value accumu-
lated in the past in the form of the material pre-
conditions of production are subject to testing on the
basis of knowable facts. The Marxian system is thus
capable of generating empirically refutable predictions.

The "labor theory of value," as the basis of a
definitional structure, cannot be considered as "true"
or "false" in itself - its validity depends on its in-
dispensability to the formulation of empirically valid

theories.

Recogni2ing its definitional nature, Joan
Robinson directs tvo highly germane criticisms to the
"labor theory of value":

In the first place, she argues, "The problem of
finding a measure of real output - a measure "which, in
the natxire of the case, must contain a certain arbitrary
element - is not solved by reckoning in terms of value,
for the rate of exchange between value and output is
constantly altering."^

This is true and vitally important, but as an
ob.iection to Marx's use of labor-time as a unit of
measurement it misses the mark.

The essential point is that the output of a given
period consists of commodities which inherently are both

1. Robinson, Essay , p. 20.

exchange -values and use-values. To measure output only
ill value terms Is to make labor -productivity a meaning-
less notion, since the value of the commodities is iden-
tical to the quantity of labor required for their pro-
duction. But Marx is continually concerned with the
nroductivity of labor - it is, in fact, his dominant
concern, and explicitly one of the basic categories of
his system. Since production means determinate change
of form, and consequently requires measurement of output
in different units from those in vhich input is measured,
it is evident that Marx either was talking nonsense or
that he posessed, at least implicitly, a conceptual basis
for measurement of real output.

The latter is clearly the case. Marx explicitly
maintains that commodities can be aggregated in their
character as use-values . Thus, virtually at the begin-
ning of Volume I, he writes:

The same change in productive power which
increases the fruitfulness of labor and,
in consequence, the quantity of use-values
produced by that labor, will diminish the
total value of this increased quantity of
use-values, provided such change shortens
the total labor-time necessary for their
production.^

1. Of. supra . pp. 11— 12. Utility is unmeasurable only in
its "abstract" form of "mere subjective utility" (Engels).
The market transformation is an objective, social process.
Through the very negation of "utility" it becomes social
and therefore quantifiable, so that Marx continually speaks
of the "quantity of use-values."

2. Capital . I, 5^.

Marx is therefore subject to justified criticism,
not for the absence from his system of a conceptual basis
for the measiirement of real output but for his taking
such measurement for granted, his failiore to derive an
explicit unit of measure of real output.

This gap in the Marxian definitional structure
can easily be filled in practice by means of measurement
of output in constant prices through whatever price-index
is judged appropriate. The theoretical problem is to
demonstrate the coherence of this system of meas^jrement
with the rest of Marx's basic categories. What must be
formulated is the meaning, in Marxian terms, of a " real "
quantity: in other vords, vhen ve meas^lre use-value in
"constant prices" just what is it that ve are using as
our unit of meas\Are?

When the product of 1955 is expressed as a quan-
tity of "1954 dollars" vhat this means is that every
unique commodity has been assigned a second price, dif-
■f erlng from its actual -price . But for Marx "price is
value in the form of money," Abstraction from current
price means abstraction from current value , which latter
term of course is grounded on the abstract category of
"socially necessary labor-time." The transformation of
current to constant prices thus represents abstraction
from abstraction, the restoration of concreteness on a
new level.

In plain English: the products of one year are
represented as the products of the labor of a different
year. In proportions determined by the relative prices of
that base year. By their expression in 195^ dollars the
commodities of 1955 are expressed as quantities of 1954
labor -time. But ¥hen labor- time is specified as being
that of a definite year we have ceased to abstract from
the social demand which determined the allocation of
resources, hence the relative price structure, prevailing
in that year. To measure in terms of dated labor is to
view this labor as concrete labor. This, indeed, is pre-
cisely what is required, since Marx defines the "concrete-
ness" of labor as its productivity of use- value.

The quantxim of use -value thus is to be defined as
the hour of dated social labor -time . Its practical de-
termination is inherently a problem of relative, not ab-
solute, measurement, since the entire system of measure-
ment depends on the base-year chosen.

One can only speculate on the reasons for Marx's
failure to specify how productivity is to be measiored.
Perhaps, in an epoch before the technique of index-number
construction was developed in practice, he was satisfied
with generalized, qualitative discussions of productivity
which do in fact provide a tolerable treatment of the
main problems.

In my opinion Marx avoided the problem mainly

because of what Joan Robinson calls the "arbitrary ele-
ment" in the system of measiirement. This does not only
involve "the index-n\amber problem," the arbitrary selec-
tion of a base year. It is equally important that to
Marx the pattern of needs, of effective use-values, in a
capitalist society is itself "arbitrary," determined by
a distribution of vealth, income, and power that he in-
dicts as distorting real social needs, real utility, and
which he seeks to abolish.

In any event, measurement of real output in
constant-price units , use -value units , is perfectly con-
sistent with measurement of factor input, capital and
income, in value units ^ labor -time units . The productiv-
ity of labor, as real product per unit of labor input, is
determinable only through the use of both systems of
measurement simultaneously, within the Marxian framework.

Joan Robinson's second criticism of the "labor
theory of value" is even more crucial. Calculation in
terms of value, she declares, is useless for Marx: "none
of the important ideas which he expresses in terms of the
concept of value cannot be better expressed without it.""^
The va lue unit is "otiose": "It has no operational con-
tent. It is just a word."

1. Robinson, Essay , p. 20.

2. Joan Robinson, Economic Philosophy (Chicago, I962) , p. ^

But is it true that use of some other unit of
measure would more effectively produce the same testable
theories that Marx derived through analysis in terms of
value? Mrs, Robinson asserts this, but she does not
demonstrate it. On the contrary - her own theoretical
work (strongly influenced by Marx) points to the area
where calculation in terms of value is indispensable to
Marx's structure.

This is the category of capital . Marx makes
capital unambiguously measurable by defining it as the
accumulated value invested in privately- owned means of
production. What is the alternative? J. B. Clark defines
capital as "a permanent fund of productive wealth , » .
describable in terms of 'money'." He does not, however,
specify the quanta of this "permanent fund" which is
"invested in material things which are perpetually shift-
ing - which come and go continually - although the fund
abides."*- And when Joan Robinson herself, in her book
The Accumulation of Capital , comes' face to face with this
problem, she has to declare non possummus ; "The evalua-
tion of a stock of capital goods is the most perplexing
point in the whole of the analysis which we have under-
taken. Indeed in reality it is insoluble in principle."^

1. J. B. Clark, The Distribution of Wealth (New York, 1902).

2. Ibid ., p. 122e

3. Joan Robinson, The Acciimulation of Capital (London,
1956), p. 117.

The essential relevance of the "labor theory of
value," its operational content, is precisely that it
makes the problem of "evaluation of a stock of capital
goods" soluble In -princi-ple ,

SxjTplus -Value

The essential thing that must be understood in

discussing Marx's analysis of the category "capital" is

that, in his viev, capital is not a "factor of production";

Capital is not a thing. It is a definite
interrelation in social production belonging
to a definite historical formation of society.
This interrelation expresses itself through a
certain thing and gives to this thing a speci-
fic social character. Capital is not the sum
of the material and produced means of produc-
tion. Capital means rather the means of pro-
duction converted into capital, and means of
production by themselves are no more capital
than gold or silver are money in themselves.
Capital signifies the means of production
monopolized by a certain part of society, the
products and material requirements of labor
made independent of labor -pover in living
human beings and antagonistic to them, and
personified in capital by this antagonism, ■'■

There is thus a clear distinction between Capital,

on the one hand, and the real "factors," Land and Labor,

on the other:

Capital is a definite form of an element of
production belonging to a definite mode of
production having a'definite cast. It is an
element of production combined vith and re-
presented by a definite social form. The
other tvo. Land on the one hand and Labor on

1. Capital . Ill, 947.

the other, are two elements of the real labor
process. In their material form they are
common to all modes of production^ they are
the material elements of all processes of
production, and they have nothing to do with
the social form of productive processes, l

In sum, for Marx the concept of capital as "factor
of production" is an instance of "commodity-fetishism,"
of visualizing the economic process as a system of rela-
tions among things . not of relations among people .
Things are capital if and only if they express the
specifically capitalist social relationship; i.e., if
they serve the production, not of utilities or even of
value in general, but of a specific type of value,
surplus -value .

Surplus-value is the capitalist form of a phenom-
enon common to all post-primitive forms of human society:
the formation of a social surplus above and beyond the
needs of the direct producers as a material expression of
surplus -labor, and the appropriation of this surplus by
the ruling class:

Capital did not invent surplus -labor. Wherever
a part of society posesses a monopoly of the
means of production the laborer, free or not
free, must add to the working time necessary
for his own maintenance an extra working time
in order to produce the means of subsistence
for the owner of the means of production,
whether this proprietor be an Athenian aris-
tocrat, Etruscan theocrat, Roman citizen,
Norman baron, American slave-holder, Wallacian

1. Capital . Ill, 949.

boyar, modern landlord - or capitalist.

This siirplus -labor, under capitalism, takes the

form of value , because that is the form which all labor

must take under this mode of production:

It is every bit as important for an under-
standing of surplus -value, to conceive it
as a mere congelation of surplus -labor -time,
as nothing but objectified surplus -.lab or, as
it is for an understanding of value in general
to conceive it as a mere congelation of labor-
time, as nothing but objectified labor. Only
the mode in vhich this surplus -labor is extracted
from the direct producer, the laborer- dif-
ferentiates the various economic forms of
society. 2

Thus for Marx the decisive point in the entire
fabric of capitalist social relationships, the point at
vhich the objective preconditions of production manifest
their character as capital , is the institution of vage-
labor . the legal freedom and economic necessity for the
individual worker to alienate to another person, during
a defined period and for a money-price, the utilization
of his ability to work. "The form of labor, as wage=
labor, determines the shape of the entire process and
the specific mode of production itself. "^

In form , wage- labor is an equalitarian relation-
ship, the exchange of equivalents. For a price agreed

1. Capital . I, 259.

2. Ibid., p. 2^1.

3. Ibid .. Ill, 1028.

to by both, the capitalist purchases from the worker the
right to use his labor-power for a given period. In
content, according to Marx, the relationship is one of
exploitation. The value of the worker's labor-power is
determined by the number of hours of social labor-time in
the form of money needed to purchase the goods required to
develop the worker's skills and maintain him and his family
at the standard of living regarded as "normal" in the given
society. This number of hours, as we have seen, must be^
less than the working -day . The difference accrues to the
capitalist who owns the entire product of the worker's labor
(i.e., the effects of the consumption of the labor-power
which has been bought at its value); but for this reason it
accrues not as a deduction, but as a new product.

The capitalist does not steal from the worker:
he exploits him. Consequently the relationships between
the classes take on a specifically capitalistic, quanti-
tatively-determined, form. That form is the ratio between
the surplus -value produced by the worke r and the value
paid to him for the right to utilize hi s labor-power;
the "rate of surplus -value." It expresses the internal
division of the working-day into a time dviring which the
worker produces for himself his necessary means of
subsistence and a time during which he produces for his
employer the social surplus.

Marx devotes Chapter XVIII of Volume I to a dis-

cussion of the correct expression for the rate of surplus -
value. He states categorically that tMs relationship
must be expressed only as the ratio between " surplus
labor " and " necessary labor " (in symbols, s', the rate
of exploitation, - i , s representing surplus -value and

V representing value of labor-power) ^ and not the ratio

between surplus -labor-time and the total working-day

(-^) , even though this second formula is directly
^ sfv ' * "

derived from the first (_|_ z ^-~- )•

What Marx is actually concerned with here is to
emphasize that the basic relationship is not the
division of a given product but the production of a
new substance: surplus -value. The "rate of exploitation"
is the "direct expression of the degree of self -expansion
of capital o"-*-

The category v in the formula - has in fact a
dual significance, corresponding to the already analyzed
dual character of s. As the share of the workers in the
social product it expresses a category common to all forms
of society. But it is also the quantitative expression
for a section of the social capital , that section which.

1. Capital, I, 583,

according to Marx, is alone responsible for the "self-
expansion of capital," because, by setting labor -power
into motion and transforming it into va lue . it leads to
the production of surplus -value. The rate of exploita-
tion thus expresses "the very transaction that charac-
terizes capital, namely the exchange of variable capital
for living labor -power and the consequent exclusion of
the laborer from the product."-^

Marx consequently regards the social capital as
made up of two components, constant capital and variable
capital , whose qualitative difference, it should be noted
clearly, is not based on any distinction in regard to
their concrete physical attributes but is entirely an
expression of the difference in their social function ,
manifested in the way in which they transfer value to the
commodity produced. Only capital expended on living
[productive] labor leads to the formation of surplus-
value and so adds to the commodity a value greater than
itself. Its value varies in the course of the reproduc-
tion process. Machines mightily enhance the productive
power of labor, but they are not directly productive of
value in the Marxian view. Since by definition value
consists of human labor-time, a thing cannot impart more
value to its product than the value which it already

1. Capital , I, 584.

contains as a product of past human labor.

That part of capital then, vhich Is represented
by the means of production, by the rav material,
axixiliary material, and the Instruments of labor
does not, in the process of production, undergo
any quantitative alteration of value. I there-
fore call it the constant part of capital, or,
more shortly, constant capital,.

On the other hand that part of capital repre-
sented by labor power does, in the process
of production, undergo an alteration of value.
It both reproduces the equivalent of Its ovn
value and also produces an excess, a surplus-
value, which may itself vary, may be more or
less according to circumstances. This part of
capital is continually being transformed from
a constant into a variable magnitude. I there-
fore call it the variable part of capital or,
shortly, variable capital . ■*•

Variable capital , then, is the sum of wages ex-
pended on the purchase of labor -pover to be consumed In
productive labor: constap .i; capital is the remainder of
the total capital:

The same elements of capital which, from the
point of view of the labor process, present
themselves respectively as the objective and
subjective factors, as means of production
and labor-power, present themselves, from the
point of view of the process of creating surplus -
value, as constant and variable capital. 2

Summary of Chapter I

The basic economic category in the Marxian system
is that of value. Marx establishes a fundamental dlstlnc-

1. Capital . I, 232.

2. Ibid ., p. 233.

tion between value and price . The former is defined as
the quantity of socia ll y necessary labor-time expended
in the production of a commodity^ the latter as the
exchange -ratio of a commodity to other commodities ex-
pressed in money and established at a particular time
by the market mechanism. This distinction reflects the
difference between aggregative long-run and partial
short-run economic analysis. Marx's main concern is
with long-run analysis in aggregative terms.

Marx defines money as the "phenomenal form" of
value ; the monetary unit of a given society at a given
time is held to represent a determinate amount of labor-
time. This labor -content of the price ui^lt is empiri-
cally determinable through the ratio between the aggre-
gate value of the commodities produced by a society in a
time period and the sum of the prices of those commodities
It is also Identical to the number of hours of productive
labor performed in the time period divided by the money
net Income of the laborers and capitalists during that
period.

Measurement of the productivity of labor requires
calculation of real output in another unit than that used
to measiire factor input. Marx treats use -value (utility)
as a quantifiable magnitude, but falls to provide an ex-
plicit unit of measiire for real output. Measurement of
output in constant p rices is fully in accordance with

the implicit Marxian treatment of the category of use-
value.

Capital is made subject to an objective standard
of measurement by Marx's definition of it as accumulated
past labor . Its essential nature, in Mars's view, is to
serve as the means vhereby the class of capitalists ap-
propriates the social siorplus -product.

Under capitalism this surplus -product has to be
sold on the market, and therefore takes the form of
sTirplus- value . Surplus -value is defined as the dif-
ference between the total niimber of hours worked by
productive laborers in the course of the year and the
value (the labor-content of the money) paid to them as
wages .

The value of the money wage is called variable
capital by Marx because in return for this money the
worker must perform more hours of work than his wage
represents, and thereby add surplus -value to it. The
ratio between surplus -value and variable capital is
identical to this ratio of the "unpaid" to the "paid"
portion of the working day. Marx calls this ratio the
rate of surplus -value or rate of exploitation .

In addition to variable capital and surplus -value
the value of a commodity also contains value transferred
to it through the consumption of raw materials and
through the wear and tear (depreciation and obsolescence)

undergone by the machinery used in production. Capital
consumed in this way merely transfers its own value to
the product, without creating any new value. Its value,
thus, can be said to remain constant, changing only in
concrete outer form. Those expenses of production which
merely transfer pre-existing value to the product are
termed by Marx constant capital .

CHAPTER II
BASIC QUANTITATIVE RELATIONSHIPS

The value of the gross product , during a given
period J of the total social capital, resolves itself
into these three constituent parts: variable capital ,
constant capital , and surplus -value . (In symbols,
P = c^vfrs) To each of these categories corresponds a
section of the mass of commodities produced having a
specific social destination. The variable capital is
objectified in those xise -values consiamed by the class
of productive -wage -laborers ; the constant capital in
those use-values required to maintain intact the con-
ditions of production and reproduction in the broadest
sense; the surplus -value in those use -values consumed
or invested by the class of capitalists.

The value of the social net product , on the other
hand, consists solely of the new value produced; namely,
the sum of variable capital and surplus -value . The net
product in real (constant-price) terms is therefore
identical to the real net income of the classes of labor-
ers and capitalists, i.e., the purchasing pover of aggre-
gate vages and surplus -value . Consequently the produc-
tivity of labor (computed, of course, as the index of

real production per man-hour) has two distinct senses:
a gross productivity and a net productivity . The two
will TDe in a stable proportion only if the share of the
value of the gross product consisting of constant capital
remains stable. If the percentage of constant capital
increases, then gross productivity will grow faster than
net productivity, and inversely.

"c" and "v" in the foregoing identity are flow
variables . whose value depends on the period over which
they are computed. But, as their names indicate, each
corresponds to a section of the total capital stock,
which is determinable at any instant. This capital
stock, therefore, can be defined by the identity K s C^V,
with each /upper case/ stock variable related to its
/Tower case/ flow counterpart, by a specific rate of

turnover .

The difference between these rates of turnover,
however, is so great that Such a procedure would un=
necessarily complicate the whole analysis . A better pro-
cedure is to assume that the stock of variable capital
is virtually zero, so that the capital stock is assumed
to consist entir e ly of constant capital, i.e., K i C.

This assumption may appear drastic, but in fact
it is extremely realistic. Most large businesses in
practice segregate the "variable" portion of their cir-
culating capital in a special payroll account, whose

Tnaximum size is slightly atove the average payroll. But
since production workers are generally paid several
days to a week after the close of the payroll period, the
■•'stock of variable capital" is always equalled or even
exceeded hy the liability "wages payable," so that its
net value is actually zero or even negative I Marx was
quite well aware of this, when in Volume 1 (p. 62l) he
wrote "the laborer is not paid until after he has expended
his labor-power . , . he has produced, before it flows
back to him in the shape of wages, the fund out of which
he himself is paid, the variable capital." Gillman,
in his statistical study though not in his theoretical
exposition, correctly sets the stock of variable capital
at zero. We will do likewise throughout this study.

These three variables ( C , v, s. ) form the terms
in which Marx expresses the three fundamental quantita-
tive relationships of his system: the rate of exploita-
tion (§.«). the organic composition of capital (Q) , and
the rate of profit (p').

The Rate of Surplus -Value

The numerical value of the rate of surplus -value,
and therewith the quantity of surplus -value produced, is
determined by two factors : the length of the working day

1. Cf . Joseph Gillman, The Falling Rate of Profit (London,
1957) I pp. ^-^''-^5-

->■

and the value of labor -po^er (i.e., the length of the
"necessary" portion of the working-day). These magni-
tudes are conceived as the average representative of
the corresponding social aggregate.

The labor vhich is set in motion by the
total capital of a society, day in, day
out, may be regai--ded as a single collective
■working-day. If, e.g., the number of labor-
ers is a million, and the average working-
day of a laborer is 10 hours, the social
•working-day consists of ten million hours .

Similarly,

The variable capital of a capitalist is the
expression in money of the total value of all
the labor povers that he employs simultan-
eously. Its value is, therefore, equal to
the average value of one labor -power, multi-
plied by the number of labor-povers employed.'^

Any change in the rate of surplus -value must be
the consequence of a change in one or both of these
quantities, and therefore Marx draws a distinction be-
tween two different methods of augmenting that rate:

The surplus -value produced by prolongation
of the working -day, I call absolute surplus -
value . on the other hand, the surplus -value
arising from the curtailment of the necessary
labor-time, and from the corresponding altera-
tion in the respective lengths of the two
components of the working -day, I call relative
surplus -value . 3

1. Capital, I, 336.

2. Ibid., p. 331.

3. Ibid . 3 p. 345.

It should tie made clear that Marx uses the
terms "absolute" and "relative" surplus -value only to
refer to Incremental quantities and never to sulDdivide
aggregate surplus -value . "Absolute sur pi lis -value" is
to be defined as that change in surplus -value caused by
a change in the duration of the working -period , and
"relative surplus -value" is to be defined as that change
in surplus -value caused by a change in the duration of
the necessary labor-time (i.e,. of the "paid" portion of
the working period .) In all subsequent use of the terms
"absolute" and "relative" surplus -value these definitions

are ^^hat is meant.

The relation between absolute and relative surpl\js

value may be illustrated simply as follows:

An average laborer vorking a 40 hour veek at a
rate of surplus -value of 100^ will produce surplus -value
to the amount of 20 labor -units . If his hours of work
per -week are Increased to 48 "while the labor-content of
his vage drops to 16 units due to an increase in pro-
ductivity he will then produce 32 units of surplus -value
per week. The increase of 12 units is composed of 8
units of absolute surplus -value and 4 units of relative
surplus -value . The rate of surplus -value will of course
have been doubled .

Put algebraically, this relationship can be

analyzed in this vay:

If the vorking-day changes from Y hours to X hours j the
productivity of labor per-hoiir increases by a^, the real
wage per -hour increases by b^, and the original rate of
exploitation is ^ ',

Absolute SurplxiS -Value is equal to X - Y

Y ( a-b )
Relative Surplus -Value is equal to i^^j- {\^q)

The New Rate of Surplus -Value is — Y (itbj ~ "'"
These categories are important for the analysis
of variations in real wages and in the length and inten-
sity of the working day, variations which have a radically
different significance according to whether they are simul-
taneous in a given society or represent the result of

changes over time .

In the production of absolute surplus -value Marx
regards a simultaneous difference in the Intensity of
work as equivalent to a difference in the duration of
work. "The value created varies with the extent to which
the intensity of labor deviates from its normal inten-
sity in the society. A given working-day, therefore,
creates no longer a cons tant but a variable value ."

But just as we saw to be the case with "skilled
labor," this equivalence does not apply to changes over

1. Capital , I, 57f

time in the average intensity of labor itself. "If the
Intensity of lahor were to increase simultaneously and
equally in every branch of industry, then the new and
higher degree of intensity vould become the usual and
normal degree for the society, and would cease to be
taken into account as an extensive magnitude."

If the duration of the working-day is unchanged ,
absolute surplus -value, an "extensive magnitude," cannot
arise. The opposite is the case with relative surplus-
value, which arises from an "intensive magnitude.," the
productivity of labor . Every change in this productivity
must ultimately affect the relative share of the working-
day devoted, at a given real wage, to "'necessary labor."

Absolute surplus -value thus cannot result from
historic changes in the average degree of Intensity or
skill. The converse of this is that relative surplus -
value cannot result from simultaneous differences in the
value of labor -power: in other terms, assuming that all
workers receive a wage proportional to the value of their
labor-power (defined by Marx as "the value of the neces-

1. Capital , I, 575*

2 on the distinction between "extensive" and "intensive"
magnitudes, derived by Marx from Hegel's, Logic, see
Naville, op. clt ., pp. 377-378.

sarles of life habitually required" plus "the expenses
of developing that labor -poweil') , it T^ould follow that
all produce surplus -value at the sam e rate of exploita-
tion . Or, to put the same idea in rigidly "orthodox"
terms: in equilibrium the ratio between the wages of
any two workers is equal to the ratio between their
marginal products .

No less a Marxist than Hilferding, however, has

disputed the above proposition:

To deduce the value of the product of
labor from the wage of labor conflicts grossly
with the Marxist theory. . . . Even if the
rate of exploitation of unskilled labor were
known to me, I should have no right to assume
that the identical rate of exploitation pre-
vailed for skilled labor. For the latter the
rate of er.ploitation might be much lower.

If this be true, then the amount of surplus -value depends,
not on the quantity of concrete labor performed at a
given rate of exploitation, but on the shapes of the dis-
persion of skills and of rates of exploitation, a con-
cept impossible to work with empirically.

Fortunately Hilfer ding's argument can be shown
to be based on a misinterpretation of a single sentence
from Marx: "1st der Wert dieser Kraft hoher, so aussert
sie sich daher auch in hoherer Arbeit und vergegenstand-
licht sich daher, in denselben Zeitraum.en, in verhalt-

1. Hilferding, op. cit ., p. l42.

,N 44

nissmassig hoheren Werten."^ Hilferdlng argued that,
because in the second German edition of Das Kapital
the word "aber" (however) stood in place of the first
"daher" (consequently), the sense of the passage "is
somewhat as follows: 'Even though the value of this
power be higher, it can none the less produce more sur-
plus =value, because it manifests itself in higher work'

- and so on."^

With his confusion between the "aber" of the
second edition and the "daher" of the third, and his
little phrase "and so on," Hilferding has quite simply
blotted out the key concept of this passage: that labor-
powers of higher value "objectify themselves ... in a
proportionately ( verbal tnissmassig ) higher mass of value."
Marx thus is saying quite bluntly that the value created
is proportional to the value of the labor power, that the
rates of exploitation are equal .

In a later part of Volume I Marx is, if possible,
even more explicit. This is the discussion of piece
wages , which Marx considers " the form of wages most in
harmony with the capitalist mod e of production." and

1. Das Kapital , I, 206, in translation, "This power being
of higher value, it consequently also manifests itself xn
superior labor and therefore is objectified, in equal spaces
of time, in a proportionately higher mass of value.

2. Hilferding, op. cit ., p. 142.

3. Capital , I, 608.

■which of course consist of paying a relative wage cor-
responding directly to relative productivity, and thus
directly carrying out the process of expressing qualita-
tively different concrete labor-powers as expressions of
homogeneous, abstract, social labor, differing only

quantitatively:

With regard to actual receipts there is, there-
fore, great variety according to the different
skill, strength, energy, staying -power, etc., of
the individual laborers. Of course this does
not alter the general relations between capital
and wage -labor. First, the individ ual differ-
ences balance one another in the workshop as a
whole, which thus supplies in a given working -
time the average product, and the total wages
paid will be the average wages of that particu-
lar branch of industry. Second, the proportion
between wa^es and surplus -value remai ns unaltered,
since the mass of surplus -lab or supplied py each
particular laborer corresponds with th e wage re-
ceived by him .-'^

Piece-wages are the form of wages "most in harmony
with the capitalist mode of production" because, despite
transitory divergences between the relative value and rela-
tive price of specific labor-powers, in the long run
labor-power, unlike other commodities, tends to sell at
its value and, in a competitive factor -market, tends to
be allocated in such a way that the product, and hence
the surplus product, of each laborer "corresponds with
the wage received by him."

1. Capital , I, 607 (italics mine).

Consequently, relative surplus -value can only
result from changes in the value of labor- power over time,
and absolute surplus -value , over time, only from changes.
in the duration of the vorking-day . The factors deter-
mining these magnitudes and their changes are identically
those determining the rate of exploitation.

The rate of exploitation is the immediate repre-
sentation of the prevailing social relationship betveen
the two fundamental classes, and as such its quantitative
determination cannot be the result of "pu.re" economic
causes. This is most immediately apparent in the length
of the working-day, whose basic duration is presently
fixed by legislation, itself the outcome of long political
and social struggles. Accordingly Marx declares:

We see then that, apart from extremely elastic
bounds, the nature of the exchange of commodi-
ties itself imposes no limit to the working-
day, no limit to surplus -labor . . . . There is
here, therefore, an antinomy, right against
right, both equally bearing the seal of the
law of exchanges . Between equal right s force
decides . Hence is it that in the history of
capitalist production, the determination of
what is a working-day presents itself as the
result of a struggle, a struggle between col-
lective capital, i.e., the class of capitalists,
and collective labor, i.e., the working class .J-

Thus absolute surplus -value is determined by

"force," and we know that the past four generations have

1. Capital , I, 259 f italics mine.

seen a prevailing tendency towaru reciuction of the working-
day. With relative surplus -value, on the other hand, -we
seem at first glance to be dealing -with an economically
determined cause, the value of lahor-power, vhich, Marx
states, "is determined by the value of the necessaries
of life habitually required by the average laborer,"
that is, the value of the "real_wage_."

li/hat hovever, determines the quantity of "neces-
saries of life" whose value determines that of labor -
power? It is certainly not a physiological minimum deter-
mined with the force of an "iron law"; on the contrary it
is a socially and historically determined magnitude sub-
ject to evolution:

The number and extent of so-called necessary
wants, as also the modes of satisfying them,
are themselves the product of historical
development, and depend therefore to a great
extent on the degree of civilization of a
country, 2 and in particular on the conditions
under which, and consequently on the habits
and degree of comfort in which, the class of
free laborers has been formed. In contradis-
tinction therefore to the case of other com-

1. Capital , I, 568.

2. Compare Ricardo: "It is not to be understood that
the nat\n'al price of labor, estimated even in food and
necessaries, is absolutely fixed and constant. It
varies at different times in the same country and very
materially differs in different countries. It essen-
tially depends on the habits and customs of the people.''
David Ricardo^ Works and Correspondence of David Ricardo ,
Volume I, Principles of Political Economy (Cambridge,
1951), P- 9^"^

modities, there enters into the determina-
tion of the value of la^or -power a historical
and moral element .•'•

For particular short-run partial analyses the
real vage can be held constant, since "in a given country
at a given period the average quantity of the means of
subslstance necessary for the laborer is practically
known." 2 Nevertheless in the long run the real wage is
most definitely a variable quantity. The question is
how far, and in what direction, can it be expected to

vary?

Perhaps the most widespread single misconception

about Marx's view of capitalism, a misconception shared
by anti -Marxists like John Strachey^ with the High
Priests of Stalinist "Marxism" (of whom the foremost
surviving specimen is Maurice Thorez), is the belief that
Marx enunciated a "Law" of "Increasing Misery" or "Abso-
lute Immlseratlon" or " Pauperization »" According to this
"Law," the net effect of capitalist development would be

to drive real wages, despite temporary fluctuations,

Ij.
down toward the absolute physiological minimum.

1. Capital , I, 190.

2. Ibid.

S The failure of capitalism to comply with this alleged
"Law" is the main thesis of his Contemporary Capitali sm
(New York, 1956) .

li A very valuable discussion of this matter is to be found
in the article by T . Sowell, "Marx's 'Increasing Misery'
Doctrine," ft pi^-rlcan Bc nnomic Review. L, No. 1 (March, 1950 j,
111 ff.

Two citations are usually presented as evidence
for this view. In the ''Communist Manifesto" of 1847
Marx and Engels vrote:

The modern laborer, on the contrary, instead of
rising with the progress of industry, sinks
deeper and deeper "oelow the conditions of exist-
ence of his own class. He becomes a pauper, and
pauperism develops more rapidly than population
and wealth. And here it becomes evident that
the bourgeoisie is unfit any longer to be the
ruling class in society . . . because it is in-
competent to assure an existence to its slave
within his slavery, because it cannot help let-
ting him sink into such a state that it has to
feed him, instead of being fed by him.-"-

Twenty years later, in Volume I of Capital, Marx stated:

The greater the social wealth, the functioning
capital, the extent and energy of its growth,
and, therefore, also the absolute mass of the
proletariat and the productiveness of its labor,
the greater is the industrial reserve -army.
The same causes which develop the expansive
power of capital, develop also the labor -army
at its disposal. The relative mass of the in-
dustrial reserve -army increases therefore ex-
ponentially "with wealth. But the greater this
reserve -army in proportion to the active labor-
array, the greater is the mass of a consolidated
surplus -population, whose misery is in inverse
ratio to its torment of labor. The more exten-
sive, finally, the lazarus -layers of the working-
class and the industrial reserve -army, the
greater is official pauperism. This is t he abso-
lute general law of capitalist accumulation . Like
all other laws it is modified in its working by
many circumstances, the analysis of which does
not concern us here .^

1. "Communist Manifesto," in Karl Marx and Friedrich
Engels, Capital and Other Writings (New York, 1932;, p. 333.

2. Capital , I, 707-

The first of these passages, -which speaks of
"the modern la"borer," can legitimately, though not con-
clusively, iDe interpreted as a prediction of the im-
poverishment of the working class. The second, however,
which states Marx's thought in a much more developed
way, gives no support for the "Immiseration" doctrine.
What Marx is here concerned with is that portion of the
labor-force more-or-less permanently unemployed as a
result of capital-intensive technological progress.
These are workers who have sunk " below the conditions
of existence " of their class; who produce no more surplus-
value, but must be fed at the expense of the ruling
class. This is a stratum, Marx declares with mathemati-
cal precision, "whose misery is in inverse ratio to its
torment of labor (deren Elend im umgekehrten Verhaltnis
zu ihrer Arbeitsqual steht) ."•'• In sura, Marx is talking
about the West Virginia ex -coal -miner, not (or not yet)
the Akron rubber -worker.

"What then is Marx's actual analysis of the his-
torical tendency of the real wage? As in the determina-
tion of the working day, so in that of the real wage Marx
places primary emphasis on bargaining power:

The fixation of /the rate of surplus -value 's_7
actual degree is only settled by the continuous

1. Das Kapital , I, 679.

struggle tet^een capital and labor, the
capitalist constantly tending to reduce
wages to their physical minimum, and to
extend the working day to its physical
maximum, while the working man constantly
presses in the opposite direction.

The matter resolves itself into a
question of the relative powers of the
combatants .

This bargaining process, however, always takes

place in a context set by general economic conditions:

a struggle for a rise of wages follows only
in the track of previous changes, and is the
necessary offspring of previous changes in
the amount of production, the productive
powers of labor, the value of labor, the value
of money, the extent or the interiSity of labor
extracted, the fluctuations of market prices,
dependent upon the fluctuations of demand and
supply, and consistent with the different
phases of the industrial cycle ."^^

In this discussion of wages Marx maintains that
"in its merely economical action capital is the stronger
side," and thus that under capitalism "it is the nature
of things" that "the general tendency of capitalist pro-
duction is not to raise but to sink the average standard
of wages, or to pash the value of labor more or less to
its minimum limit ."

All of this, however, still does not add up to a
discussion of real wages; Marx is referring to the "value

1. Karl Karx, Vslus ^ Price, and Profit (London, 1899), p. 88.

2. Ibid., p. 84.

3. Ibid., p. 92.

of labor" and considering struggles over wages as
"efforts at maintaining the given value of labor."

In fact Marx never declares explicitly that real
wages must tend to rise in the course of capitalist
development. This position, however, has a very strong
implicit basis in Marx's general approach to the question.

The theory that the level of real wages must
tend to increase can be derived from several points in
Marx's discussion of wages:

(a) As we have seen, the "necessary wants" are
dependent on the "degree of civilization." As capitalism
develops, therefore, these "necessary wants" increase,
so that the socially determined minimum grows relatively
to a physiologically-determined subsistence level. A
possible mechanism to bring this about is that increases
in Y;orking-class living standards, when they partially
correspond to the already-realized progress of other
classes, would be regarded by the workers as permanent
and psychologically incorporated into the "necessary
wage • "

1. Ibid ., p. 92.

2. This point is made quite strongly in the essay by
Sowell previously cited*

(b) Marx regards the expenses of education
and training as factors determining the value of labor -
pover, and states that these expenses "vary with the
mode of production."^ To the extent that increasing
productivity requires increased specialization, training,
and literacy on the part of the average xJorker the neces-
sary minimum real "wage is thereby increased.

(c) Marx regarded the increasing intensity of
work as a central aspect of economic development under
capitalism. This increased intensity of labor, if not
compensated by at least a proportional increase in real
wages, would be physically ruinous to the worker. "By
increasing the intensity of labor, a man may be made to
expend as much vital force in one hour as he formerly
did in two. In checking this tendency of capital, by
struggling for a rise of wages corresponding to the ris-
ing intensity of labor, the working man only resists the
depreciation of his labor and the deterioration of his
race."^ Thus increased real wages are necessary to the
very self-preservation of the worker.

(d) Finally, the growth of productivity allows
for increases in real wages without any decrease in the

1. C apital , I, 569.

2. value. Price, and Profit , p. 82.

amount of surplus -value produced and even with an in-
crease in surplus -value . When the value of consumption
goods is falling, "it is possible with an increasing
productiveness of labor for the price of labor-power
to keep on falling and yet this fall to he accompanied
by a constant growth in the mass of the laborer's means
of subsistence .'

This third means of raising the necessary real
wage is available only to the extent that workers are
organized and can compel capital to share with them the
gains from increasing productivity. It " depends on
the relative weight which the pressure of capital, on
the one side, and the resistance of the laborer, on the
other, throws into the scale . "^ And of course, in the
most celebrated passage of Capital Marx speaks of the
increasing "revolt of the working-class , a class always
increasing in numbers, and disciplined, united, organized
by the very mechanism of the process of capitalist pro-
duction itself."^

The conclusion must be that if there is a "law"
of real wages in the Marxian system it should be entitled,
not the "Law of Increasing Misery" but the "Law of

1. Capital , I, 573'

2. Ibid .

3. Ibid ., p. 783.

increasing Reaulreroentg ." And this indeed is hov Lenin,

in 1593, put the matter:

We must not lose sight of the indubit-
able fact that the development of capitalism
inevitably entails a rising level of require -
nic»n-Hs ^'^■^ ^-^e entire population^ incluaing
the industrial proletariat. This rise is
. . . brought about by the crowding together,
the concentration of the industrial proletariat
vhich enhances their class consciousness and
sense of human dignity and enables them to
vage a successful struggle against the preda-
tory tendencies of the capitalist system. ^
This lav of increasing requirements has maia-
f as ted itself ^^th full force in the history
of Europe - compare, for example, the French
proletariat of the end of the eighteenth and
of the end of the nineteenth centuries, or ,
the British worker of the 1840's and of today.

What Marx clearly does expect is a decline, not
of the real wage, but of the value of the real wage. He
maintains that the continual increase in the potential
labor-force due to the proletarianization of former
peasants, artisans, and shopkeepers, in addition to the
natural growth of population, will tend to exceed the in-
crease in employment due to capital accumulation, particu-
larly since he expects technological progress to be
highly capital-intensive.

If we assume, with Marx, that the structure of
the labor market is or can be made essentially monopo-

1. V. I. Lenin, "On the So-called Market Question,"
CollectedWoiM (Moscow, i960), I, 106.

lis tic ;, the existence of a growing "industrial reserve
army" is perfectly consistent vith a rising real -wage
level. But since this "monopoly power" of unions is
at "best far from complete, and is confronted with at
least as well organized a "monopsony power/' there are
substantial economic forces working against a more than
gradual tendency toward increasing real wages. Th\iS
despite the increase in the real wage, "the abyss be-
tween the laborer's position and that of the capitalist
would keep widening"-^ if the working -day remains

constant.

IVhat then can be predicted on the basis of the
Marxian system as to the long-run tendency of the rate
of surplus -value? As we have seen, this change is made
up of both absolute and relative surplus -value, but
absolute surplus -value tends to be a negative , and rela-
tive surplus -value a positive , magnitude. In other words,
both the total working day and the duration of its "paid"
portion tend to decrease in the long-run. There can
therefore be no general economic law governing the move-
ment of the rate of exploitation: it appears almost en-
tirely as a function of the balance of social forces.
Accordingly, despite violent short-term fluctuations,
any long-run increase or decrease in the rate of exploita-

1. Capital , I, 573.

tion would "be expected by Marx to show Itself only as
an exceedingly slow and gradual trend. Marx himself
expected the rate of surplus -value to increa-se in the
long-run. Nevertheless, in terms of the Marxian sys-
tem, the actual prevailing historical tendency of this
rate cannot be predicted on theoretical grounds - it
must be determined empirically.

In analyzing the rate of surplus -value it re-
mains to ascertain the concrete manifestations of the
categories v and s_ in the capitalist economic system.

v cannot be identified with the total wage -bill

of the enterprise or of society. Marx defines it as

representing exclusively the outlay on labor-power to be

consumed as productive labor j the sole source of surplus -

value :

Capitalist production is not merely the pro-
duction of Gom.modities, it is essentially
the production of surplus -value .... That
laborer alone is productive who produces
surplus -value for the capitalist, and thus
works for the self -expansion of capital .
If we may take an example from outside the
sphere of production of material objects , a
schoolmaster is a productive laborer when, in
addition to belaboring the heads of his
scholars, he works like a horse to enrich the
school proprietor. That the latter has laid
out his capital in a teaching factory, instead
of i-i a sausage factory, does not alter the
relation . Hence the notion of a productive
laborer implies not merely a relation between
work and useful effect, between laborer and
product of labor, but also a specific, social,
relation of production, a relation that has

sprung up historically and stamps the
laborer as the direct means of creating
surplus -value .

Marx thus states two necessary conditions for
labor to be productive:

(a) The productive laborer must "vork for the
self -expansion of capital" - his labor-power must ex-
change with capital and not with revenue, he must work
for a capitalist, not for the direct consider of his
product. "A singer who sells her song on her own is an
unproductive worker. But the same singer commissioned
by an entrepreneur to sing in order to make money for
him is a productive worker. For she produces capital."

(b) The productive laborer must produce com -
modities since surplus -value , like value in general, can
only come into existence if it is embodied in a com-
modity. However the commodity is not, as Adam Smith
thought, defined as necessarily a durable material sub-
stance. Marx makes it unequivocally clear that the ser-
vices performed by schoolmaster and singer are commodities
defined as such by their abstract characteristics as
product of social labor and obiect of alienation.

What, then, is unproductive labor? It is not

1. Capital , I, 558 (italics mine).

2. Theories of Surplus -Value , p. 186.

useless, aimless activity (vhich would be a type of
leisure , not labor) . Unproductive labor is defined
by Marx in its contrast to productive labor: it is
that portion of the total social labor vhich produces
no surplus -value because it is not engaged in commodity
production or because it is not employed by a capitalist.
There are thus vast domains of social activity^ notably
the spheres of circulation and of government , in which
the -wage -laborers are unproductive despite the formal
Identity of their social position to that of wage-
laborers in the productive spheres .

Nevertheless, since it ranks ss social labor ^
unproductive labor must still be socially necessary .
This follows from the fact that the work performed by
these laborers is necessary to capital . "The capitalist
mode of production begets . . . the creation of a vast
number of employments, at present indispensable but in
themselves superfluous.""^ Certainly a genuinely
socialist comm^mity would require a vastly altered govern-

1. Capital , I, 581 Cf. also J. Robinson, Essay , p. 20 n.:
"The distinction /between productive and unproductive
labor/ is clearly important. Industry and transport
are necessary to society in a sense in which the activity
of searching for buyers is not, and in the present age of
advertising the distinction between production costs and
selling costs is even more significant than it was in
Marx's own day.

mental and aistributional system. But today the only
relevant criterion is necessity for the functioning of
capitalist society.

Within the private capitalist sector, the Marxian
division between productive and unproductive labor cor-
responds quite closely to the \asual business bookkeeping
and cost -accounting practice. The -wages of productive
employees are costs , and go above the "gross -profit
line" ; the payments to non-productive workers are ex-
penses., and go below it. The Census of Manufactures
classification of "Production and related -workers" like-
wise corresponds to these categories:

Workers (up through the working foreman
level) engaged in fabricating, processing,
assembling, inspection, receiving, storage,
handling, packing, warehousing, shipping (but
not delivering), maintenance, repair, jani-
torial, watchman services, product develop-
ment, auxiliary production for plant's own
use (e.g. power plant), record keeping, and
other services closely associated with these
productive operations .

Among non-" production -related workers" the

Census definition includes:

Factory supervision above the working fore-
man level, sales, sales delivery, advertising,
credit, collection, installation and servicing
of own products, clerical and routine office
functions, executive, purchasing, finance,
legal, personnel, etc.^

1. U. S. Bureau of the Census, Census of Manufactures ,
195^ . (Washington, 1957), I, xvii.

With one minor exception (installation and
servicing of own products) this enumeration quite con-
forms to the Marxian definitions .

For the same reason that v_ does not include the
entire v?age bill, s_ does not stand for the total of
"unpaid lahor" performed by tlie class of wage -workers .
A great deal of social labor is "unproductive" ; never-
theless the \inproductive laborer, exactly like the
productive worker, sells his labor -power at a price ap-
proximating its cost of production, and consequently
also "performs partly unpaid labor ."

Surplus -value thus is that portion of the social
surplus -labor which assumes the form of value and in that
form is appropriated by the property-owning classes . It
is divided into three categories: "profit of enterprise,"
"interest," and "rent."

It is here that profit is defined by Marx. Since
commodities are sold at a price systematically diverging
from their value, the surplus -value embodied in a com-
modity alwa;^^ differs from the surplus -value realized
by the capitalist producer. It is this latter quantity
alone that constitutes profit from the viewpoint of the
Individual capitalist. But on the scale of the whole
society, if total interest and rent are added to the

1. Capital , III, 354.

total profit, this aggregate must be equal to the aggre-
gate surplus -value :

In a capitalist society, this surplus -value
... is divided among the capitalists as a
dividend in proportion to the percentage of
the total social capital held by each. In
this shape the surplus -value appears as the
average profit "wiiich, in its turn, is sepa-
rated into profit of enterprise and interest,
and \7hich in this way may fall into the hands
of different kinds of capitalists . . . the
landlord, in his turn, pumps a portion of this
surplus -value, or surplus -product, out of the
capitalist in the shape of rent.

Hence, when spealcing of profit as that
portion of surplus -value -which falls to the
share of capital, we mean average profit
(profit of enterprise plus interest) -which has
already been limited by deducting the rent from
the aggregate profits (identical in mass with
the aggregate surplus -value .) Profits of
capital (profit of enterprise plus interest)
and ground-rent are merely particular con-
stituents of surplus -value , categories by
which surplus -value is distinguished according
to whether it falls into the hands of capital
or of private land. This classification does
not alter its nature in any way. If added to-
gether, these parts form the sum of the social
surplus -value .-'■

If V, then, comprises only the wages of produc-
tive laborers, and s is " identical in mas s" with the sum
of prof it-of -enterprise, interest, and rent, how are the
wages of unproductive labor to be treated? Although Marx,
as we will see, provides in essence a clear explanation,
he does not do so explicitly, and even seems to contradict
himself in certain regards. This has led to gross misin-

1. Capital , III, 955.

terpretationSj some commentators seeking to subsume

these wages under "v,""'- others, 'with only slightly less

violence to Marx's meaning, under "s.."

Concretizing Sveezy's view, Gillman writes :

In Marx's schema, 'profit' includes
all income accruing to the capitalist
above his prime and factory overhead costs,
and is equivalent to the 'gross profit' in
capitalist accounting practice. The whole
congeries of administrative expense and
selling costs, as well as rent, interest,
eni business taxes, are all part of surplus -
value . 3

Having thus totally misconstrued the content
which Marx ascribed to the category surplus -value ,
Gillman quite naturally got weird-looking results from
his attempt at an empirical test of Marx's predictions
concerning the rate of profit. In order to obtain a
closer correspondence with the facts, he therefore in-
serted into what he took to be the Marxian theory two
new categories: "unproductive expenses" and "diminished

s_" (net profit), the latter being equal to 3_-u.

h.
This is theoretically an indefensible procedure

1. Cf. Robinson, Essay , p. 20, fn.

2. Cf . Sweezy, The Theory of Capitalist Development , p. 279;
"The employees in the commercial sphere are paid out of
surplus -value ."

3. Gillman, The Falling Rate of Profit , p. 17.

4. In practice "s_-u" can be made equivalent to the
Marxian s .

both "because it retains the erroneous definition of s_
and TDecai:^e in u and "diminished s_" it introduces
categories which are not constituent parts of the value
of the commodity and consequently cannot be integrated
in the general Marxian model of capitalist production.

A seeming justification for this approach,
nevertheless, oan be found in a passage from volume II
■which presents the expenses of circulation as "a deduc-
tion from the surplus -value or surplus -product ." How-
ever, in its proper context, even this passage points
toward conclusions very different from those Gillman
has drawn. In his original text Marx wrote:

"Das allgemeine Geset;^ lat, das alle
Zirkulationskosten, die nur aus der Form-
verwandlung der Vfare entspringen, dieser
letztren keinen Wert hinzusetzen. Es sind
bloss Kosten zur Realisierung des Werts Oder
zu seiner Uebersetzung aus einer Form in die
andre. Das in diesen Kosten ausgelegte
Kapital (eingeschossen die von ihm kommandierte
Arbeit) gehort zu de n faux frais /uhproduktiven,
aber notwendig Eos ten/ der kapitalistischen
Produktion. Der Ersatz derselben muss aus dem
Mehrprodukt geschehn, imd bildet, die ganze
Kapitalistenklasse betrachtet, einen Abzug vom
Mehrwert oder Mehrprodukt, ganz wie fur einen
Arbeiter die Zeit, die er zum Einkauf seiner
Lebensmittel braucht, verlorne Zeit ist."2

lo Capital , II, 169.

2. Das Kapital , II, 143, in translation, "The general law
is, that all those expenses of circulation which only
arise from changes of form of commodities, add no value
to the latter. They are merely expenses required for

To understand this it is essential to realize

that Marx refers to the expenses of circulation as "a

deduction from the s\ir plus -value or surpliis -product"

only "from the point of view of the entire capitalist

class" and not from the standpoint of the process of

capitalist production as a whole. For this process

they are "necessary expenses" and no more a "deduction

from surplus -value" than are the totality of hours of

working time "lost time" to society, even though they

appear as this to the working-class . In reality whs.t

takes place in the unproductive spheres is simply the

outlay of a determined and necessary co nstituent part

of the total social capital :

These costs form additional capital , but
they produce no surplus -value . They must
be made good out of the value of the com-
modities . For a portion of the value of
the commodities must once more be converted
into these circulation costs; and no addi-
tional surplus -value is created thereby. So
far as this concerns the total capital of
society it means that a portion of it must be

the realization of value or for its conversion from one
form into another. The capital laid out for these ex-
penses (including the labor employed by it) belongs to
the faux frais [unproductive but necessary expenses J of
capitalist production. Its replenishment must be carried
out from the surolus -product and forms, from the poinx
of view of the entire capitalist class, a deduction from
the surplus -value or surplus -product, just as, for a
laborer', the time required for the purchase of his means
of subsistence is lost time."

set aside for secondary operations which
are no part of the process of creating
value, and that this portion of the social
capital must be continually reproduced for
this purpose .1

Since these commercial and political overhead
expenses, though unproductive of ne'w value, signify the
consumption of a portion of the social capital, the
value consumed in this way, in order to assure its con-
tinual reproduction, must enter into the total value
of the mass of commodities produced. "The additional
value, which the merchant adds to the commodities by
his expenses, resolves itself into an addition of pre-
viously existing values .''

As we saw earlier, the difference between vari-
able and constant capital is founded on their differing
modes of transferring value to the commodity-product;
and in the case of constant capital this characteristic
mode is precisely the addition of previously existing
values . Consequently the appropriate treatment for the
outlay on unproductive expenses in general, ' provided only
that they are "socially necessary" under the existing
form of social organization, is to regard them as part of
the constant capital advanced and expended.

1. Capital ^ III, 3^3, italics mine

2, Ibid., p. 3^5.

Marx never explicitly defines the "unproductive
but necessary expenses" of capitalist production as part
of the constant capital, since in his reproduction
schemata he abstracts entirely from the unproductive
spheres (-which would complicate the analysis in several
ways, including the seeming paradox that the fraction of
the consumer-goods output consumed by unproductive
laborers ^rjould have to be considered "capital goods" in
a peculiar sense) and assumes, as in most places through-
out Caciial, a society composed exclusively of capitalists
and productive laborers . Nevertheless in the problem
■with which the present study is concerned, that of the
rate of profit, Marx is categorically clear that the
necessary unproductive expenses are to be treated in

that way:

" Every expense of this kind . ♦ . reduces the
rate of profit because the advanced capital Increases
but not the surplus -value . If the surplus -value s. re-
mains constant, while the advanced capital C Increases

s
to C :!- AC, then the place of the rate of profit - is

taken by the smaller rate of profit q ^ ' ^q •"

In practice unproductive expense and surplus -
value can sometimes masquerade in each others form.
Thus a large portion of top administrative salaries and

1. Capital , III, 353, italics mine.

perquisites is merely a disguised form of profit while ^
in the opposite case, for "the actual retailers" a major

part of their nominal profit is really only "^^ages for

11 2
labor - v?retched unproductive labor though it is .

The Organic Composition of Capital

The difference between constant and variable
capital J as >7e have seen, reflects the fundamental dis-
tinction between the "objective and subjective factors"
of the labor process, between the means and conditions
of production and living productive labor. The relation-
ship between these two sides of the labor-process can
be expressed quantitatively through a number of different
ratios of which one, the "Organic Composition of
Capital," is placed by Max in a pivotal position in his
general theory. Marx defines this ratio in these

terms :

A definite number of laborers corresponds
to a definite qusjitity of means and pro-
duction, so that a definit e quantity of
living labor corresponds to a definite
Quantity of labor already objectified in
means of production .-^

1. "On the basis of capitalist production a new swindle
develops in stock enterprises with the wages of manage-
ment. It consists of placing above the actual director

a board of managers or directors, for whom superintendance
and management serve in reality only as a pretext for
plundering stockholders and amassing wealth. Capital,
III, 458.

2. Marx, Letter to Engels of April 30, 1868, in
Correspondence , pp. 244=245.

3. Capital , III, 171, Italics mine.

As Joan Robinson puts it, what Marx means by
"organic composition" is simply " capital per man em -
ployed" •*• (assuming a ^-/orking day of given length). It is
t© he expressed quantitatively as the ratio bet^veen tvo
quantities of labor -time: the value invested in means
of production and the value nevly created during the
production period .

In algebraic form;, therefore, the organic com-
position of capital is defined by the formula Q = ^^^g, j

C 2
or, equivalently, Q = -^=^—

V • S

Marx, however, is far from always expressing

himself this clearly on the precise definition of what

he means by "Organic Composition," and this has misled

many commentators c Thu^ Gillman:

Prom the formula ci-vi-s = c' Marx derived
three ratios which served him as foundation
stones for his theory of capitalist develop-
ment. One of these is the ratio between c and
V - between, constant capital consumed and
variable capital consumed o This ratio, com-
monly expressed as c/v, Marx called the orpianic
composition of capital. He called it 'organic'
becaiose it expresses the relations of the
'dead' to the 'living' labor - of the constant
to the creative qualities of the variable capi-
tal .3

1. Robinson, Essay , p. 8.

2. Cf. Rolf Gusten, Die Langfristige Tendenz der Profitrate
(Munich I960).

3. Gillman, op. cit ., p. l6.

G-illman starts from the formula c-f-v+s = c»»
But this is not the formula for capital , it is the formula
for the commodity-produc t. The constant and variable
capital consumed are not at all the necessary representation
of the constant and variable capital involved in the pro-
duction process. The former are flows , the latter stocks .
Only if there exists no fixed capital, and if all portions
of the circulating capital have equal periods of turnover,
can these two ratios coincide e

It is true that in many places Marx proceeds on
just this assTomption, and thus generally operates with
the - ratuo, assumed equivalent to the organic composition

as defined above. But for him it had exclusively the
character of a drastic and unrealistic simplification,
adopted solely for convenience in arithmetic illustrations.
At all points Marx makes it very clear that, so far as
constant capital is concerned, it is the invested capital
("The mass of means of production employed") that is the
basis for all ratios involving the composition of capital,
and not the constant capital consumed in the total process of
social production. By identifying the two, Gillman was led
to a misleading and laborious computation of organic compo-
sitions and rates of profit on a "flow basis," alongside his
at least more relevant computations on a "stock basis."

1. capital , I, 671,

However J recognizing that constant capital is
to be computed exclusively on a "stock basis/' as the
average Invested capital dioring a given period, clears
up only the least of the difficulties. In the ratio
C/v the symbols do not stand for the means of production
and living labor employed, but for the values Invested
in given quantities of labor-pover and means of produc-
tion, vhich is not at all the same thing:

The composition of capital is to be under-
stood in a twofold sense. On the side of
value J it is determined by the proportion in
which it is divided into constant capital or
value of the means of production, and variable
capital or value of labor-power, the sum total
of wages. On the side of material, as it func-
tions in the process of production, all capital
is divided into means of production and living
labor-power. This latter composition is deter-
mined by the relation between the mass of the
means of production employed, on the one hand ,
and the mass of labor necessary for their em -
ployment, on the other . I call the former the
value -composition , the latter the technical
composition of capital. Between the two there
is a strict correlation. To express this, I
call the value -composition, in so far as it is
determined by its technical composition and
mirrors the changes of the latter, the organic
composition of capital. Wherever I refer to the
composition of capital, without further quali-
fication, its organic composition is always
understood. 1

From this passage Gillman comes to the conclusion that:

Marx was very clear on the point that, whenever
he dealt with the relation between the organic
composition of capital and the rate of profit.

1. Ibid., I, 671* Italics mine.

it was to 'value -composition' and not 'tech-
nical composition' that he referred. It is
in the value relations hetveen the constant
and the variable capitals that Marx located
this aspect of his theory of economic develop-
ment .^

But if there is one thing clear here it is that
Marx is saying notliing of the sortc The value -composi-
tion can he assimilated to the organic composition only
''in so far as it is determined hy its technical com-
position and mirrors the changes of the latter" due to the
existence of "a strict correlation" between the tv?o.
This is by no means always the case: "Capitals of the

same organic com.position may have a different value-

2
composition."

By "technical composition" Marx essentially sig-
nifies what modern economists call '" capital intensity/'
the quantity of capital goods in "real" terms cooperating
with each worker at some "normal" level of full employ-

^ ^- 4-u^ -.oo-f-sr. Means of Production
ment, the ratio ^^^er of worke Ti^

In what sense, then, can it be said that changes
in this ratio have a "strict correlation" with changes in
the value -composition?

Value -composition (to which we arbitrarily attach
the symbol R) Is given by the formula R = c/v. Technical

1 . Gillman, p. 30*

2. Capital , III, 890.

C • Iv
composition (symlDol T) is then given by T = ^ * j^ (xv

and Ic being the values of the price indexes for labor-
power ana means of production, respectively.)

A strict correlation will exist only if every
relative change in gr will produce an identical relative

change in R - i.e., if the elasticity of R with respect

dR T ~ T
to T is unitary. Unitary elasticity means that ^ * r "

Since R = T If , f = § ana I r If , tto (|f)' -" L

and Ic : Iv.

This "strict correlation," therefore, can exist
only if the price indexes themselves are always equal, a
virtual impossibility. There is, moreover, an additional
difficulty. Variable capital is "the index of ... a
definite quantity of living labor set in motion" if and
only if "the rate of surplus -value and the working day
have been assumed to be constant and the wages for a
definite working day are given." Marx throughout makes
this assumption, but he makes it purely in order to sim-
plify his exposition. In any attempt at analysis it must
at a certain point be dropped, and Marx's failure to do
so explicitly has resulted, not in simplification, but in

enormoios confusion.

The relationship between R and £. depends entirely
on s_', the rate of surplus -value, since ^ ~ ^ i- s ' . Thus

1. Ibid., pp. 172-173.

'Where s ' is constant by definitionsas we have seen to be
the case in cross -section equilibrium, R and ^ are really
equivalent to each other, and it is in this sense that
Marx sometimes treats them as identical. If over time sj_
is considered variable, chaiiges in R will overstate or
understate changes in g_ according to whether s± increases
or decreases .

On the long run tendency of the "Organic Composi-
tion of Capital" Marx is categorical: Human progress,
identical to the development of the productive forces,
necessarily involves a steady increase in the technical
composition of capital, and this must be reflected in an
increasing organic composition:

The progressively higher organic composition
of the social capital is, in another way, but
an expression of the progressive development
of the social productive power of labor .1

The Rate of Profit

In the actual workings of a capitalist economy
surplus -value, as such, is never directly perceptible.
It attains reality only in its derivative form of profit
(including, for purposes of this analysis, rent and in-
terest..) Accordingly, it is only in this form that surplus'
value can play its role as the goal and regulator of

1. Lbid . , p. 248.

capitalist production. It operates directly as a con-
stituent of the price of commodities > and only ultimately
as a constituent of their value .

As we saw at the outset, Marx insists upon the
necessary divergence between the "value" of a commodity
and its "exchange value" or "natural price." This diver-
gence is a reflection of the fact that it is profit and
not surplus -value that enters into price; and whereas
surplus -value is entirely a function (given the rate of
exploitation) of the variable capital consumed, profit
is always calculated on the total capital advanced.

Since the organic composition of capital (which
in cross -section equilihriiim analysis is also equivalent
both to capital -intensity and to " value -composition" )
differs from industry to industry (each having its own
unique technology as well as specific material circum-
stances) the quantitative equivalence of profit to sur-
plus-value would impose a different rate of profit in
every particular industry. But just as it is a formal
condition of equilibrium for the marginal return to a
"factor" to be the same in all its alternative uses, so
is it a real tendency of a capitalist economy for capital
to "flow" to areas where the highest profits are expected
and out of the least profitable fields of investment,
thus modifying existing supply-demand relationships in
such a way as to reduce the previous profitability-

differential. Worked out to its end, this tendency
would result in the formation of a single rate of
profit prevailing throughout the economy.

Accordingly^ the tendency tovard uniform profit-
ability must result in relative commodity prices dif-
ferent from relative values. Marx calls these equilib-
rium prices the prices of production : "The price of
production of a commodity is equal to its cost-price
/I.e., ct-v7 plus a percentage of profit apportioned
according to the average rate of profit, or, in other
words, equal to its cost-price plus the average profit."

This price of production is, of course, "the
same thing as what Adam Smith calls natural price,
Ricardo price of production or cost of production , and
the physiocrats prix ne cess aire" . . . and the same as
Marshallian "long run average cost." It acquires its
specifically Marxian form on only one "basis? that of
the determination of the average rate of profit itself.
This rate of profit is essentially the ratio -|- ^ov the
total economy, the ratio of aggregate surplus -value to
aggegate capital. "The general rate of profit arises
through the total surplus -value produced being calculated

1. Capital , III, 186.

2. Ibid., p. 233.

on the total capital of the community (the class of

X ..1
capit-allsts) .

The aggregate surplus -value , then, enters into
the product of every capitalist in proportion to his

invested capital:

The various capitalists, so far as
profits ere concerned, are just so many
stockholders in a stock company in which
the shares of profit are irnif ormly divided
per 100, so that profits differ in the case
of the individual capitalists only in ac-
cordance vith the amount of capital invested
hy each in the aggregate enterprise, i.e.,
according to his investment in social pro-
duction as a -whole, according to the number
of his shares .2

The identity of aggregate surplus -value to ag-
gregate profit is thus held by Marx to reconcile, on
the level of the whole economic system, the micro -
economic disparity bet-ween the value and the price of
production of individual commodities :

The sum of all the prices of production
of all commodities in society, comprising
the totality of all lines of production, iS
equal to the sum of all their values. 3

The relation between the value and the price of

production of a given line of industry, as conceived by

Marx, can be presented in a precise algebraic form.

1. Theories of Surplus -Value , p. 337-

2. Capital , III, 187-

3. Ibid., p. 186.

1, "1

/^'■- 78

though Marx himself failed to do soo

As we have seerij the organic composition of a
given capital or of the social capital as a whole is

r* S ^'7

given by Q = ^ ^ . i , the rate of profit "by ' — ^-^j

and, by substitution, p' = s' ^ C, the stock of

QU ^ s*)

invested constant capital, is related to o, the con-
stant capital consumed, by a rate of turnover t (here
assumed to be given and uniform throughout the economy)
so that c = Cto In addition we represent the ratio of Qi,
the organic composition of capital in industry i,to the
organic composition of the social capital by A ^^ = —o

The value (^) of the product of industry 1, then,
is equal to

®i * "'^i * '^1'^' ~ ^"'^i ^^'^ ^*^ ^ '^ ^1 ^^ ^' ^^^
Zi = vi (1 •^ s*) (Qj^t •«' 1)

Its price of production (Pi), correspondingly,

Q* s* V4
is given by c^ 4- Vj^ * p»C = Q^v^ (1 * s») t + v^^* -i — J:

^i - ^i ^'h ^^ * ^^' * * ^^"^ ^* ^1^^

The "transformation coefficient" between price

of production and value for industry i, ^^, is thus

Pi viLOi (1 + s») t + (1 + s' Ai) 3

determined by the ratio ■=- = — - — rr-r — r- — 77: — ^ ^ -. —

Zj. V. (± + s«; (Qi t * 1)

e^i = 1 * s'

Oj^ t + 1
while for the entire economy Z 0-1?.

For a further disciission of this quetstion, see
Appendix A .

Summary

The net product during a given period has a
value equal to the number of hours of productive labor
expended by the members of society, productive labor
being defined as the work done by laborers employed by
capital and directly or indirectly necessary for the
production of commodities . The gross product has a
value identical to the sujn of the prices of the final
products in the sj^stemo

The difference in value bet-ween the gross and
net products is defined as the constant capital consumed.
The value of the net product consists of variable capital ,
the total wage received by the productive laborers, and
stir plus -value , the total of property incomes in the fcrms
of profit, interest and rent. The capital consumed in
unproductive but necessary areas of the economy counts
as pert of the constant capital, and enters into the
value of the gross, but not the net, product.

The value of the total invested capital can be
regarded as representing entirely a stock of constant
capital, and under tliis assumption the basic categories
of the Marxian system are expressed by the four symbols
C,c.,v, and s_ - representing respectively the average

Stock of capital, the constant capital consumed, the
variaMe capital consumed, and the surplus -value
produced during the year.

These economic aggregates are linked "by three
fundamental quantitative relationships: the rate of
surplus -value or rate of exploitation, s.' ; the organic
composition of capital, 9,; and the rate of profit, £' .
These ratios are determined hy:

s' = s

Q =

_ c

v^s

p. - s

The general inter -relationship of the system is
expressed hy the equation:

"ollTs^

p, - s'

CHAPTER III

THE LAV/ OF THE PALLING TENDENCY OF THE RATE OF
PROFIT AS PRESENTED BY MARX

Marx's Formulation of the "Law"

The idea that economic development is inescapably
accompanied by a secular decline In the rate of profit was
by no means original with MarXo On the contrary, when
Marx wrote this proposition had been for nearly two cen-
turies generally accepted as a social law as well as a fact
of experience. Its status as a dogma is Indicated by the
admission of Profo Shadwell, who in 1^77 denied the exis-
tence of such a tendency, that "this theory, however, is
in opposition to the unanimous opinion of all other Politi-
cal Economists, who maintain that there is a constant fall

2
of profit as society advances, "

As to the cause of this tendency, however, there
was no such unanimltyo "The economists saw the problem, "
wrote Marx, "and oudgeled their brains in tortuous attempts
to inteirpret it. Since this law is of great importance

1, Cfo G. U So Tucker, Progress and Profits in British
Sconomio Thought, 1630-IS50 (Cambridge, 19faO)o

2o "A System of Political Economy, " po 165, cited in 'Tucker,
oPe cit» , p. 3»

for capitalist production, it may be said to be that
mystery ^hose solution has been the goal of the entire
political economy since Adam Smltho "

Marx claimed that the "riddle" was solved through
his analysis of capital into constant and variable com-
ponents and the relationship between them expressed in the
"organic composition of capltalo "

The basis of Marx's thesis is the assertion of a

secularly rising tendency of the organic composition of

capital, reflected in a similar tendency of the "value

composition"?

We have seen that it is one of the laws of
capitalist production that its development
carries with it a relative decrease of
■variable as compared with constant capital,
and consequently as compared to the total
capital which it sets in motion, 2

If the rate of exploitation is assumed to remain
constant or virtually so, the amount of profit is essen-
tially proportional to the number of worfeers ©mployedo
Since, however, the value invested as capital for each
worlsjer is steadily increasing, the ratio of the mass of
profit to the mass of capital must decline ;

This progressive tendency of the average
rate of profit to fall is, therefore, but

io Capital , III, 25O0
2. Ibid., p, 2^.

a peculiar expression of capitalist produc-
tion for the fact that the social productivity
of labor is progressively increasing. This is
not saying that the rate of profit may not fall
temporarily for other reasons. But it demon-
strates at least that it is the nature of the
capitalist mode of production, and a logical
necessity of its development, to give expression
to the average rate of surplus -value by a
falling rate of average profit. Since the mass
of the employed living labor is continually on
the decline compared to the mass of objectified
labor incorporated in productively consumed
means of production, it follo-ws that that
portion of living labor, which is unpaid and
represents surplus -value, must also be continu-
ally on the decrease compared to the volume
and value of the invested total capital.
Seeing that the proportion of the mass of
surplus -value to the value of the invested
total capital forms the rate of profit,
this rate must fall continuouslyol

Cf t

Putting this in terms of the equation p« = .^^^^ . ^

it is clear that if s ' is constant the rate of profit is
a decreasing function of Q, so that if Q increases over
time p' must tend to decrease over time.

The mechanism by -which the fall in the rate of
profit is brought about, according to Marx, is the same
as that by which the mass of profit is increased: the
accumulation of capital . For this reason Marx calls it
"the two-faced law,"

Every competitive entrepreneur, in order to maintain

1. Ibid., p. 249.

his pr-oflts both in mass and rate, seeks simultaneously
to increase the volume of his ps^oductlon and to lower its
average cost. His gross Investment, expended on the most
advanced (and hence, on Marx's assumption, the most capital-
intensive) means of production, is simultaneously capital^
broadening as well as capital-deepening, since it will
provide facilities for the employment of a larger quantity
of labor-potfero In the short run the innovator, on the
basis of his temporary "monopoly^ of the new technique,
is able to sell his goods at close to their former price
of production, thus attracting to himself a higher-than-
proportional share of the total surplus- value and raising
his own rate of profit above the social average *

When the innovation is fully diffused, however,
it no longer provides a higher rat© of profit since the
"monopolistic" situation has dlsappearedo The new
average rate of profit will be lower than previously be-
cause of the general increase in the organic composition
of the total capital even though, given a constant rate
of exploitation, the total profit will have increased due
to the employment of a greater number of workers.

This, then, is the "Law of the Falling Tendency
of the Bate of Profit" as Marx presents it in Chapter XIII
of vol. Ill, "Sas Gesetz als solches. " It has exclu-
sively the character of a long run tendency of capitalist

evolution; but one which is always in operation inasmuch
as "The capitalist process of production is essentially
at the same time a process of accumulation, "

In this chapter, however, Marx remains on an ex-
tremely high level of abstraction in which, in general,

1) the rate of exploitation is assumed to be constant,

2) the inoreae© in the organic composition of capital Is
treated as a simple reflection of the increasing pro-
ductivity of labor, and 3) thelon^-^ran rate of profit
and the influences upon it are isolated from the fact org
governing the short and intermediate range behavior of
overall economic activityo The next two chapters,
"Entgegenwirkende Ursachen" ("Counteracting Causes") and
"Entfaltung der Innern Wldersprfiche des Gesetzes" ("Un-
ravelling of the Internal Contradictions of the law"),
make the analysis considerably more realistic and concrete,

The Oountervailini? Factors

In the Marxian formula p« « b« , 2I «i2.1 be

Q(l48')

increased either by an increase in 8j_ or a decrease in £.
Thus forces offsetting a tendency of 2L *° f&ll must work
either through Increasing the rate of exploitation or de-
creasing the organic composition of oapitalo

lo Ibid. , p. 255.

Such forces, furthermore, may have effects of two
different sortss the first express long-term, fundamental
Immanent tendencies of capitalist evolution which must be
regarded as an integral part of Marx's theory of the
falling tendency of the rate of profit itself; the others
are of an exclusively short-run variety, events either of
a unique or self-reversing nature.

Only effects of the latter type can really be re-
garded as produced by <* countera cting cause Se " Marx,
however, though he is explicit that "the same causes

which bring about a tendency of the rate of profit to

fall, also check the realization of this tendency, "
treats causes of this sort together with those of a
genuinely » counteracting" nature, without clearly dis-
tinguishing between them.

Marx enumerates five different main counteracting
causes i "Raising the Intensity of Exploitation," "Cheapen-
ing of the Elements of Constant Capital," "Depression of
Wages below their Value, » "Relative Overpopulation, " and
"Foreign Trade." Of these the first two have (in part
only, as we will see) the nature of permanent and funda-
mental tendencies; the others are short-term possibilities
available to concrete capitalist economies.

1. Ibid., p, 277.

The long-term tendency of the rate of eacploltation
was discussed in Chapter lo At that time we saw that,
secularly, absolute surplus-value is a negative, and rela-
tive surplus-value a positive, magnitude. Accordingly
their resultant is an expression of the balance of social
forces, of the "class struggle," and Is not mechanically
determined by economic or technological variables, A
secular rise in the rate of exploitation cannot therefore
be deduced from the Marxian system„ Marx himself seems
to have expected such a rise to take place, and in the
discussion on "counteracting causes" he operates under the
specific assumption that this will be the cases "The
falling tendency of the rate of profit la accompanied by

a rising tendency of the rate of surplus- value , that is,

1
the rate of exploitation. •«

The question whether this hypothetical "rising
tendency of the rate of exploitation" can be so strong as
to negate completely the effects of a rising organic com-
position of capital will be examined later. In terms of
"counteracting causes" we are here concerned with short-
term effects.

Marx presents three main ways in which the rate
of exploitation may be raised in the short run; intensi-

1. Ibid. , p, 221.

fioatlon of work, prolongation of the working day, and
"the temporary but always recurring, elevations in surplus-
value above the general level which keep occurring now in
this and now in that line of production redounding to the
benefit of those individual capitalists who make use of
inventions etc, before these are introduced elsewhere, "

The first two of these are at best temporary and

2
self -reversing. As was shown previously, more intense

work represents a greater drain on the "vital forces" of
the workers and therefore Increases the subsistenoe level
of the real wage. Under Harz's assumption that labor
power in the long run is sold at its value , this implies
an ultimate increase in real wages "corresponding to the
rising intensity of labor." Similarly, every extension
of the working-day must be followed fairly soon by at
least an equal contraction, in view of the empirical fact
of a prevailing secular decline in hours worked per man
per year.

Finally, it is hard to see i4hj Marx included the
effect of innovations for particular capitalists as a
counteracting cause (he himself gives no explanation).
It would seem that such innovations produce relative

lo Ibid. , p. 22g.

2. Of. supra , ch, II, p. 53.

surplus-value only as a function of their higher productivity,
and hence their higher organic composition. And if the
overall rate of surplus-value remains constant the excej)-
tional profits of particular capitalists must he balanced
by be loK^average profits for others.

"Raising the Intensity of Exploitation, " according-
ly, has two contrasting aspects: an assumed secular in-
crease in the rate of exploitation as a consequence of the
increasing productivity of labor; and a number of possible
short-run methods of increasing relative or absolute sur-
plus-value, gains which, however, must speedily prove

ephemeral,

"Cheapening of the Elements of Constant Capital, "
likewise, ia primarily an immanent tendency of capitalist
development, and Marx explicitly describes it as such:

the same development, which increases the
mass of the constant capital relatively
over that of the variable, reduces the value
of its elements as a result of the increasing
productivity of labor. In this way the
value of the constant capital, though
steadily Increasing, is prevented from in-
creasing at the same rate as its real volume,
that is. the real volume of the means of
production set in motion by the same amount
of labor-power o^

But in what sense is this a "counteracting cause"
to the increasing organic composition of capital? Rather

1, Capital, III, 276.

Is it merely a statement that the organic composition
itself must grow more slowly than the technical composl°
tion of capital, maintaining in full force the "law" that
the organic composition of capital must steadily increase
(a proposition whose theoretical validity will be examined
later ) „

Marx continues {

In exceptional cases the mass of the ele-
ments of constant capital may even increase,
while its value remains the same or even
faliSo"*-

These "exceptional cases," then, provide the true
short=run "conteracting eauseo" Mars is here referring
particularly to increasing efficiency in the utilization
of raw materials, reduction of waste, development of by-
products, etCo A temporary spurt of strongly wcapital-
saving" innovations of this sort could conceivably block
the rise of the organic composition of capital or even
cause it to fall, preventing the rate of profit from
falling for this reason^ But given the existence of a
rising secular tendency of the organic composition of capi-
tal, such "exceptional eases" must be followed by a sharp
though temporary rise in ^, as it returns to its trend
value o

1. Ibid. , po 277.

We C5an nm discuss the remaining "counteracting
causes" which do not have this immanent aspeote

On "depression of Vlagee "below their Value" Iferx
merely states that this "has nothing to do with the general
analysis of capital hut belongs in a presentation of com-
petition, which is not given in this worko Hov;ever it is
one of the most important causes checking the tendency of
the rate of profit to fallo"

"The Depression of Wages below their Value" clearly
means the reduction of the real wage below the previous
quantity of "necessaries of life habitually consumed by
the average laborer o" Since, as we have seen, this quan-
tity tends to rise with the development of capitalism, any
fall in it can only be temporary, to be followed by a strong
over-compensation. However, under the impact of the
cyclic movement of the capitalist economic system, signifi-
cant periodic decreases in the real wage may conceivably
take place, and the , consequence of each could only be a
marked, though transient, increase in the rate of profit.

The fourth counteracting cause, "Relative Over-
population," cannot act as such in a purely capitalist
economy - its effects are based on the fact that "the im-
perfect subordination of labor to capital continues in

le Ibid., po 276.

Fiany lines of production, and continues longer than seems

at first glance compatible with the general stage of de-

1
^elopmento"' But capitalistic techniques must ultimately

invade these sectors as wells

neif lines of production are opened up,
especially for the production of luxuries,
and these lines take for their basis this
relative overpopulation set free in other
lines of production by the increase of
their constant capitalo These new lines
start out with living labor as their pre-
dominating element, and go by degrees through
the same evolution as the other lines of
production o'=i

This possibility, however, is available to a
eaptialist economy primarily in th© early stages of its
growth, when non^capitalist sectors (artisans, individual
peasant farmers), account for a sizable portion of national
income — and even then only if these sectors sell their
products to the capitalist sector at prices more or less
corresponding to values (ioC,, only if they are not al-
ready being exploited as internal colonies )» Thus its
effect as a counterweight to a falling tendency of the
rate of profit can at best be very slight, although ex-
pansion into certain types of services remains a possi-
bility throughouto

lo Ibid. , V, 277.

2. Ibid^, Italics mine.

A much more significant oounterr^lght is provided
by the general category of "Foreign Trade." This effect,
according to Marx, is brought about in two different wayso
One is the expanaion of trade with other capitalist econo-
mies s

To the extent that foreign trade cheapens
partly the elements of constant capital,
partly the necessities of life for which
the variable capital is exchanged, it tends
to raise the rate of profit by raising the
rate of surplus-value and lowering the
value of the constant capital. It exerts
itself generally in this direction by per-
mitting an expansion of the scale of pro-»
ductlono^

In this sense, as a means for realizing economies
of scale, foreign trade is nothing more than the inter-
national projection of th© Immanent tendencies of capi-
talist evolution previously discussed under the headings
"Raising the Intensity of Exploitation" and "Cheapening
the Elements of Constant Capital^ — and analytically can
in no way be separated from them.

Matters are very different with respect to the
other domain of foreign trade; trade with a country »0
colonies. Here, Marx contends, is to be found a most
substantial force supporting the rate of profit in the
metropolis. In the first place, "In competition with
commodities produced in other countries TJith lesser

1, Ibid., III. 27s.

facilities of production „ „ o an advanced country is

enabled to sell its goods above their value « » « labor

of the advanced countries is here exploited as a labor of

a higher specific weight, the rate of profit rises because

labor which has not been paid as being of a higher quality

1
is sold as sucho" (In itself this "comparative advantage"

argument implies no exploitation of one economy by another
the capitalists of both are gainers by ito This, how-
ever, is totally reversed when the advanced country holds
both a monopolistic and monopsonistic position, enforced
by direct or indirect political domination. Then the dis-
persed native producers of primary products will have to
sell to a single buyer able to impose a price below that
which might be offered by other buyers, while metropolitan
manufactured goods are sold at a level artificially main-
tained through protective tariffs. Trade itself thus
becomes a means of colonial sxploitatlon. This, of
course, is the general rule — few colonial powers have
ever practiced the ^open door policy" In their own pos-
sessions, )

Of no less importance are the profits stemming from

direct Investments

Capitals Invested in colonies may yield a
higher rate of profit for the simple reason

1, Ibid., po 272,

that the rate of profit is higher there on
account of the backward level of develop-
ment, and for the added reason that slaves,
coolies, etc., permit a better exploitation
of labor 0^

Marx does not develop these points further, since
this question "by its special nature is really beyond the
scope of our analysiSo"^ Nevertheless they form the haalB
on which the followers of Mam subsequently developed their
theoretical analysis of imperiaxism,-

Thls is, indeed, a point at which the Marxian
economic analysis merges completely into politics. Since
the general rate of profit includes profits extracted from
the colonies, any tendency of this rate of profit to fall
cannot be counteracted by mere maintenance of the existing
level of colonial profits. What is required is the con-
tinuous ejcpansion of the colonial sector relative to a
metropolitan economy that is itself csqjanding.

Once all available territories have been colonized,
however, this expansion of the colonial sector can only
come through conquest from another colonial power (i.e.,
world war) , or else through more intensive exploitation
of existing colonies, a process which finds political

le Ibid . , po 279.

2o Ibid,, p. 278.

3. Of. Vo lo Lenin, Imperialism, The Highest Stage of
Capitalism (New York, 19^), pp. I38-140. ~

limits in the form of revolutionary nationalist move-
ments and economic limits in the generally backward and
unbalanced structure of the colonial economyo (In his
pamphlet on Imperialism , however, Lenin appears to Ignore
these economic limits? "The export of capital greatly

a-Pfects and accelerates the development of capitalism in

1
those countries to which it is exported,") In any case,

as capitalism develops in the metropolis imperialism be-
comes progressively less able to offset a falling tendency
of the metropolitan rate of profit, even though colonial
"super-profits" might well make the absolute level of that
rate higher than it would other-«-lse be*

Thus we see that, leaving aside for the present the
immanent tendencies toward an increase in sj_ and a relative
decrease in £ as compared to T, the "counteracting causes"
enumerated by Marx can have at most a temporary effect in
supporting the rate of profit, and in the long run must be-
come virtually ineffective o

Gonsequences of the "Law"

In the introduction to this study we saw that Marx
considered the falling tendency of the rate of profit to be
the economic expression of "The barrier of the capitalist

lo Ibid. , Po 144.

mode of production, " The "law, " Marx argued, tends to
bring capitalist production to a "standstill" and allows
economic progress only at the price of "periodio crisesc"
Accordingly, the long-run consequences which Marx deduced from
the "law" are to be understood primarily in terms of his
theory of crises*

The basis of this theory is provided by the "cir-
culation schemata" of Volume II, and in particular the

1
model of expanded reproductiono The most general form of

this model states that in any period net investment in
constant capital is equal to the net product of the capi-
tal-goods industries ("department I") less the constant
capital consumed by the consumption-goods industries ("de-
partment II"), AC s V, 4. s,- c^, so that /\C - V, (1 4 s*) -
Qv^(l •» s' )t (as in the previous chapter t here represents
the rate of turnover of the stock of constant capital,
assumed equal to the entire capital stock).

If, then, r is the equilibrium rate of growth of
the capital stock, the equilibrium level of net investment
is given by

rC js rQ (v,4 vj(l 4- s') - v, (1 4 s' ) - Qv^ (1 4 s«)t
It follows that there exists a fundamental rela-
tionship of proportionality between the variable capital

1, Of. infra. Appendix A, pp. 243-244.

flov (ioSo, the emplojnnent ) in the two departments, given

by the ratio v, s Q (t 4 r)
Vg^ 1 « rQ

Since this proportion is conceived by Marx as an
objective datum established by the path of growth histori-
cally followed by the system. Mars maintains that the actual
volume of Investment, as determined by the decisions of
the capitalists, is the key variable detez^ining the ^oie
level of economic activity* This can be expressed as a
"multiplier" relationship between changes in net investment
and changes in the level of employment (I standing for AC) s

d(v. 4Va ) B g(v.4Vs.) 4 a(^. 4Va ) o dg e 1 , odg

a I 91 "^ 9Q dl rQ(l4s') "* Q*(l4s') dl

This can be translated into a Keynesian-type

analysis through the implicit formula for the propensity

to save [Y standing for net income, (v, 4v^ ) (l4s' )] given

by the reciprocal of dY s g^^o§^ m ^ C.dg s_J.Cl-5£ ^3

dl 91 9Q, dl rQ Q* dl rQ Q ^I

thus 1 - rQ

dY 1 - r!c$S

dl ^^

The underlying behavioral assumption would be that
the ex ante rate of saving (as a percentage of net income)
reflects the past rate of accumulation and tends to in-
crease as income increaseso

In any case, what is Important for Marx is that
at every point there exists a level of investment, determined

by the past growth pattern of the system, that will main«
tain the system on its equilibrium gro^h path, and ^iiich
is given by the equation I 2 rC„

If in any period I is significantly different from
this equilibrium value the effect would be destabilizingo
(Marx of course rejects out of hand the theory of automatic
equilibration through the market rat© of interest.) Thus,

if I>rC, then ?i%. Q(t4r} This relative increase in em-
Vi-^ l-rGi

ployment in the capitaL-goods Industries increases demand
for consumer goods, leading the producers of department II
to increase their investment, thereby raising aggregate
investment still further above the equilibrium level and
causing yet further increases in investment until some
barrier to the process is reached. Conversely, if KrC,
department II will be faced with insufficient effective
demand for its products and thus will be led to contract
its investment, causing a doimward spiral until some
support level is found.

Since in this model cycles are initiated by dis-
equilibrating changes in the rate of investment, the deter-
minants of the rate of investment are the prime movers in
the process. It is here that Marx places his full em-
phasis on the rate of profit s «The rate of profit, i.e.,
the relative increment of capital, is above all important
for all new offshoots of capital seeking an independent

100

locatloiie^ The profit rate is " the fundamental -premise

-g . -

and driving force of accumulation , " Accordingly, the
occasion of a "crisis" In the Marxian model is a decline
in the inoremental rate of profit (the "marginal efficiency
of investment") helots the point at ^Aiich it would call
forth an amount of Investment AC 5 rG«,

Under the specific assumptions on which Marx de-
rived it, would the falling tendency of the rate of profit
be, in itself , sufficient to produce such a crisis?
These assumptions, of course, are 1) that b^ is constant
(i.e., that the supply of labor-power over time is in-
finitely elastic at the given value of labor-power) and 2)
that Q is an increasing function of the accumulation of
capltalo In order for the amount and rate of accumula-
tion to be determinate, given a constant s^, a further
assumption is necessary s Investment will continue to the
point at which the incremental rate of profit is equal to
some given fraction of the previously prevailing ratSo
This minimum rate of return beyond which further invest-
ment will not be undertaken corresponds essentially to

1. Capital , III, 30J<-.

2o Ibld» , p, 30if, In view of these categorical statements
it is hard to understand how Joan Robinson, on the basis of
phrases from Volo I where the category of "profit" has not
even been introduced, arrived at the view that Marx thought
investment was independent of the rate of profit.

101

the Keynesian "liquidity trap."

The determination of Investment in a model governed
by these assumptions is illustrated by the following dia-
gram, in vhich the Marginal Efficiency of Investment
schedule is shown in reference to the prevailing rate of
profit immediately prior to each time period and to the
minimum profitability line p' ' corresponding to it. The
subscripts denote time periods, not departments of pro-
duction.

dAC

MEIx

102

MEIj represents the marginal effieleney of Invest-
ment schedule applying in period lo p'^ represents the
rate of profit prevailing immediately prior to period 1,
and p"i, assumed equal to 2/3 p'l, represents the minimum

profitability level beyond which investment cease So

Under our assumptions the KEI schedule is negative-
ly inclined throughout, and drawn from a negative starting-
point with coordinates p'j. and the amount of disinvestment
required, under the assumption of a technology that grows
steadily more capital-intensive, to maintain a constant
organic composition of capital and therefore a constant rate
of profit.

The intersection of the period 1 marginal efficiency
schedule and minimum profitability line at (A, p»i) repre=
sents the determination of the actual investment in period
1„ If this investment is sufficient to maintain the sys-
tem in equilibrium, this Implies that A - rCi (Ci is, of
course, the total capital stock of period 1)„

In period 2, as a result of investment during
period 1, both the capital stock and its organic composi-
tion have increased and the rate of profit at the start of
the period (p'g) ^^^ decreased. Therefore the MEI

1, I.e., that the rat^a of surplus-value is constant and
that Q is an increasing function of capital accumulation.

103

schedule has shifted downward and to the left, and is now
drawn from a starting point at p'g and the amount of dis-
investment now required to maintain the organic composition
of capital and rate of profit constant ,

If the minimum profitability line is maintained in
a constant ratio to the base rate of profit (ioeo,

^ -^ ^ ^^ the intersection of the period 2 minimum

P^ P^

profitability line and marginal efficiency schedule will

take place at (B, p"2)«

If, however, the equilibrium growth rate of the

capital stock has remained constant investment in period 2

will be insufficient, since the capital stock has increased

so that rC2^rC2 while actual investment has decreased from

A to Bo Unless the equilibrium growth rate has meanwhile

fallen from A to B a "crisis of underinvestment" will

^1 ^2
occur.

However, it is precisely one of the implications

of the Marxian model that a fall in the rate of capital

accumulation will necessarily result from a falling tendency

of the rate of profits "the rate of accumulation falls with

1
the rate of profit." The relationship between the rate

of profit and the equilibrium rate of growth is determined

1. Ibid. , 2g3o

104

l>y dr^ s V. (Us') Thus it ie possible, through con-
dp' (v, ^v^)s»

tinual adjustment of the equilibrium growth rate to the
falling rate of profit, for this model of capitalism to
exhibit a "crisis free" evolutiono

In this case the role of the falling tendency of
the rate of profit as "the barrier of the capitalist mode
of production" would be exerted through the steady decline
in the rate of capital accumulationo This tendency to^^ard
stagnation, following from the falling tendency of the rate
of profit, "requires for its defeat periodical crises "J
in either instance, despite the assumed absence of any
technical limits to investment and the existence cf a
positive incremental rate of profit at all levels of in-
vestment, the capitalist economy ie unable to assure the
uninterrupted growth of the productive forces at the ac-
celerating rate technologically feasible.

The actual businese=cycle theory of Marx involves
only one fundamental change in the foregoing analysis:
the assumption of a constant sj, is dropped. T^ether, in
the long run, e^ tends to remain constant or to increase,
in the course of a given cycle it is subject to substantial
fluctuation. Consequently the incremental rate of profit

1, Derived from vt - Q(t-Jr) through substitution fQ « s* \,

105

can no longer be treated simply as a function of the or-
ganic composition of the marginal investment — the effect
of this investment on the rate of exploitation alao must
be taken into account,, Since at a certain point of every
cycle the "reserve army of labor" is radically depleted,
putting great upward pressure on wages, the shift do\mward
and to the left of the MEI schedule at that point is not
correlated with the factors determining the long-term
equilibrium rate of growth, and thus cannot be compensated
for by a decline in r, Marx, therefore, states the im-
mediate conditions for a crisis in terms of changes in the
rate of exploitation:

an overproduction of capital, not of indi=
vidua! commodities (although the overpro-
duction of capital al-^ays includes over-
production of commodities), signifies
simply an over«=ae cumulation of capital.
In order to understand what this over-
accumulation is , , , one need only assume
it to be absolute, Tftien would overpro-
duction be absolute: overproduction which
would affect not Just one or- another or a
few important spheres of production, but
would be absolute in its full scope, hence
would extend to all fields of production?

The purpose of capitalist production . o .
is self -expansion of capital, i.e., appro-
priation of surplus- labor, production of
surplus- value, of profit. Thus as soon
as capital, in proportion to the laboring
population, would have grown to such an
extent that neither the "absolute labor-
time yielded by this population nor the
relative surplus-labor- time could be ex-
panded any further (this latter would,

106

moreover, not be feasible even in the case
that the deiaana. for labor would be very-
strong, hence a tendency for wages to rise)
as soon as a point was reached where the
increased capital produced no larger, or
even smaller, quantities of surplus- value
than it did before its increase, there
would be absolute overproduction of capi-
tals ioeo, the increased capital C -^ AC
would produce no more, or even less, profit
than capital C before its expansion by AC,
In both cases there would be a strong and
sudden fall in the general rate of profit,
due to a change in the composition of
capital on account, this time, not of the
development of productivity but of an in-
crease in the money-value of the variable
capital (because of increased wages) and
the corresponding reduction in the propor-
tion of surplus-labor to necessary labor o^

It is, nevertheless, quite wrong to conclude from

the foregoing, ae does Sweezy, that "Marx is here talking

about a kind of fall in the rate of profit different from

2
that Implied in the «law««" On the contrary, only if

the "law" is in continual operation is it legitimate to

expect a " strong and sudden " fall in the rate of profit

to result from a period during which the real wage had

increased faster than the average net productivity of

labor. The "sudden" fall in the rate of profit at the

moment before the crisis is the combined effect of an

increase in § and a decrease in s^. These changes, in

1„ Capital , III, 29^ (F.L.P.H. ed,, p. 246, German ed,,
p, 2go7I

2, Sweezy, op, olt. , pc 152 n.

107

turn, are the fruit of a period in ^hlch net investment

is at a level high enough to sustain full employment —

and such a period is itself one of the aspects of the

"two-faced law with the same causes for a decrease of

the rat© of profits and a simultaneous increase of the

1
absolute mass of prof itSo "

Marx's theory of the essential nature of the cycle

as a ts^ole follows rather simply from his analysis of the

point of crisis s

Th© equilibrium would be restored under
all circumstances through the withdrawal
or even the destruction of more or less
capitalo This would extend partly to
the material substance of capital, o « e
The principal work of destruction would
show its most dire effects in a slaugh-
tering of the values of capitals . . .
at the same time still other agencies
would have been at worfe» The stagnation
of production would have laid off a part
of the worldng-clasa and thereby placed
the employed part in a situation where
it would have to submit to a reduction
in wages even below the average. 2

Thus the depression reduces the organic composi-
tion of the employed portion of the existing capital
through disinvestment due to depreciation and, especially,
to obsolescence, while simultaneously increasing the rate
of surplus- value. Therefore a higher rate of profit

1, Capital , III, 25g.

2. Ibid., p, 297 (F.L.PoH. ed. , p, 2^9),

108

than previously realized becomes possible, (In terms of
the previous diagram, the MEI schedule has shifted upward
and to the right,) Meanwhile the sharp fall in the actual
rate of profit reduces the minimum profitability criterion
used by capitalists in their investment decisions, on the
assumption that this criterion is based on the realized
profit rate. (If this assumption is not justified, due
to strong expectations of a further fall in the rate of
profit, the capitalists may even behave perversely by
raising their minimum profitability criterion* If that
is the case the system is headed for collapse, ) Ulti-
mately, in any case, the marginal efficiency of investment
must Increase enough to generate a quantity of investment
larger than that required by the equilibrium growth rate.
The depression then passes its trou^ and gives way to a
recovery. "The stagnation of production would have pre-
pared — within capitalistic limits — a subsequent ex-
pansion of production." These "capitalistic limits"
manifest themselves in the fact that the falling rate of
profit produced by a rising organic composition of capital
and ultimately a falling rate of exploitation finally
brings on a new crisis, "The same vicious cycle would
occur once more under expanded conditions of production,

1, Ibid., p. 299.

109

With an expanded mariet and increased productive forces."

The crucial position of the falling tendency of
the rate of profit in Marx's economic doctrine emerges
most clearly from consideration of the inrplications of
the attsence of such a tendency.) If we assume that the
additional capital AC required to maintain the "normal"
rate of employment of the labor force will not reduce the
previous rate of profit, henoe win itself be as profit-
able as the existing capital stock, there is no systematic
reason v;hy a profit-maximizing capitalism should fail to
generate that quantity of investment o

In euch an economy the business cycle would have
an essentially benign character, serving merely to cor-
rect the disproportions resulting from atomistic competi-
tion. The economy as a whole would have no immanent
barriers whatsoever - its expansion would be limited
only by the availability of labor-power and natural re-
sources. The central argument of "scientific socialism,"
that the capitalist mode of production becomes a fetter
on the development of the productive forces, would fall
to the ground. There might still be a case for socialism,
but it would have to be argued exclusively on a moral, not
an economic, basis.

1. Ibid., p. 299<

p,"^ no

Marx iB, therefore, quite consistent in presenting
the falling tendency of the rate of profit as "the Tmrrier
of the capitalist mode of production." The validity of
his theory at this point is a necessary condition under-
lying the claim of the Marxian system as a whole to general
validity.

Ill

CHAPTER IV

COMPARISON OF MARXIAN AND N0N-14AKXIAN
THEORIES OF A FALLING RATE OF PROFIT

The distinctive and salient charaoterlstiGS
of Marx's "law" can oe brought out most clearly through
contrast with those orthodox, or at any rate non-Marxian,
theories which have also predicted a secular fall in
the rate of profit© Such theories have been constructed
along two main lines: a falling tendency of the rate of
profit has been ascribed either to liiaitations in the
field of physical production through the operation of
some form of "the law of diminishing returns" or to lii&-
itatlons in the field of realization of profits due to
tendencies toward "undcroonsumptiono"

Both of these approaches, in embryonic form,

can be found in '•The Wealth of Nations •" At first Smith

attributes the falling rate of profit simply to the

effects of competitions

The increase of stock, which raises wages,
tends to lower profit, ""hen the stocks of
many rich merchants are turned into the
same trade, their mutual competition nat-
urally tends to lower its profit? and when
there is a like increase of stock in all
the different trades carried on in the

.\:'

112

same sooiety* the same competition imist
produce the same effect in them all, a

Shortly thereafter he specifically brings

in diminishing returns on landj though only in passing,

in reference to nev/ colonies:

As the colony increases^ the profits of
stock gradually diminish. When the most
fertile and test situated lands have been
all occupied, less profit can be made by
the cultivation of what is inferior both
in soil and situation©^

Finally Smith reverts to competitions

As capitals increase in any country, the

px'uxj.bO niixuil vsSu uc uiau.o ujr oiuyxOjrAng

them necessarily diminish. It becomes
gradually more and more difficult to find
within the country a profitable method of
employing any new capital. There arises
in consequence a competition between dif-
ferent capitals, the owner of one endeav-
euring to get possession of that employ-
ment which is occupied by another. But
upon most occasions he can hope to Justle
that other out of this employment by no
other means but by dealing upon more
reasonable terms. He must not only sell
what he deals in somewhat cheaper, but in
order to get it to sell, he must sometimes
too buy it dearer. IThe demand for pro-
ductive labour, by the increase of the
funds which are destined for maintaining
it, grows every day greater and greater.
Labourers easily find employment, but the
owners of capitals find it difficult to
get labourers to employ. Their compe-
tition raises the wages of labour, and
sinks the profits of stock . . . the profits

1. Adam Smith, The Wealth of Nations , Book I, chapter 9
(Library of Universal Literature edition. New York, 1911) >
I, 151.

2» Ibido . I, 157-

113

Which can hs made by the use of a capital
are in this manner diminished, ae it were,
at "both endSftl

Smith thus seems to put his main emphasis on
the implicitly underconsumptionist sides the failure
of the market to expand in proportion to production is
the assumption underlying his preposition that the in-
creased product can he sold only "on more reasonable
terms©"

Ricardo^ who overlooked the "diminishing re-

turns" aspect of Smith's theory, attacked his predecessor

most sharply on this point?

Adam Smith uniformly ascribes the fall of
profits to accumulation of capital, and
to the competition which will result from
it, without ever adverting to the in-
creasing difficulty of providing food for
the additional number of laborers which
the additional capital will employ « • • •
Adam Smith speaks here of a rise of wages,
but it is of a temporary rise, proceeding
from increased funds before the population
is increased! and he does not appear to
see that at the same time that capital is
increased, the work to be effected by
capital is increased in the sam© proportion*
Mo Say has» however, most satisfactorily
shown that there is no amount of c&uital
which may not be employed in a oountryi> be-
oauea demand is only limited by production . 2

Rioardo's own explanation, accordingly, was
entirely based on the tendency of money wages to rise

1« Smiths op» cit «« Bk. II, eho U', II, 38c
2. Ricardo, Principles , p* 289, italics mine.

114

as essential foodstuffs 13603016 more and more expensives

however abundant capital icay "becomej there
is no other adequate reason for a fall in
profit l3ut a rise of wages, and further it
may be added, that the only adequate and
permanent cause for the rise of wages is
the increasing difficulty of providing food
and necessaries for the increasing number
of workmen»l

This approach was essentially a simple exten-
sion of the Rioardian theory of rents since the price
of food is determined by its cost of production on the
least fertile or least favorably situated land in
oultivationj and since the increase in food produotiori
needed to maintain the additional workers required by
the increased capital stock ifill Involve use of lees
fertile, higher-cost lands, the price level of all agri-
oultraral produce, considered by Rlcardo to be the typical
wage-good, will increase to its cost at this new margino
The money-wage, assumed to express a subsistence real
wage, will necessarily rise in proportion to the in-
creased price of food^ and profits decrease by the same

amounts

The natural tendency of profits then is to
fall; forj in the progress of society and
wealth, the additional quantity of food
required is obtained by the sacrifice of
more and more labour • This tendency, this
gravitation as it were of profits, is
happily checked at repeated Intervals by

1, Rlcardo, Princi-ples . p. 296,

115

the improvements in machinery, connected
with the production of necessaries, as
well as by discorerles in the science of
agriculture which enable us to relinquish
a portion of labour before required, and
therefore to lower the price of the prime
necessary of the labourero^

Ricardo's viev; of technological progress as a
factor counteracting the falling tendency of the rate
of profit has two essential characteristics which con-
tinued to play the central role in post-Rioardian
classical and neo-classical economic theory on this
subjecto

Most conspicuous is Ricardo's belief that

progress in technology can merely be a partial offset

^oheeking" the workings of a "natural tendency o" As

John Stuart Mill, in this area a faithful disciple of

Ricardo, rationalized this view:

Agricultural skill and knowledge are of
slow growth, and still slower diffusiono
Inventions and discoveriesi tooj ocotir
only occasionally^ while the increase of
population and capital are continuous
agencies* It therefore seldom happens
that Improvement^ even during a short
time, has eo much the start cf population
and capital as actually to lower rent* or
raise the rate of profits .^

Of equally fundamental importance is the implicit
assumption underlying this treatment of technological

1, Ricardo, ot?a cit ». p« 120.

2o J» S, Mill, Principles of Political Economy (New
York, lB6'4)t II, 30^.

116

changes lB5>rovement in produotive techniques is viewed
as essentially exogenous to capital accumulationj as
a "resisting agency," The expectation of Ricardo and
Mill that the rate of profit will fall with capital
accumulation thus simply expresses the opinion that the
"forces" depressing the rate of profit, principally
diminishing returns in agriculture, will prove to out-
weigh those "forces" increasing it, notahly technological
progress o

The neo-classical economists generalized the
Ricardian methodology and prediction into the fundamental
proposition that a falling tendency of the rate of return
on invested capital is the consequence of a declining
marginal productivity of capital. This was expressed
most categorically by J» B. Clark:

Capital is the element that is outgrowing
lahor. We may take the world that exists,
instead of an imaginary one, as our illus-
trationo As the accumulation of capital
actually goes on, it shows itself more and
more in qualitative changes of existing
instruments • • • they thus represent a
greater outlay incurred for a smaller gain »
♦ . . Tools are^ of course, employed in the
order of their productivity ... it soon
ceases to he possihie to add to a working
equipment anything that produces a multiple
of Its own cost in a year, and the interest
on the final increment of capital becomes a
fraction of that capital itself. This
fraction steadily dlminishea as the pro-
ductive fund gro'wa larger . • • as accumula-

1, Mill, op« clt >, II, 319.

c\.

117

tlon proceeds, there are always made
costlier machines, representing more capi-
tal; and the product that comes from using
them is a smaller fraction of their cost
o . c we are utilizing the opportunities
for investment that stand late in the
series, and are low in the scale of produc-
tivity » 3-

Clark is explicitly descrihing, not the abstract
consequences of accumulation under the assunrotion of
static technology, but his view of the true long-run
dynamic tendency of " the world that exists o" As with
Ricardo and Mill, for Clark the balance of forces must
necessarily produce a resultant tendency toward dimini-
shing returns o

If, however, the assumption that technology
must progress less rapidly than the capital stock in-
creases is challenged, the neo-olassioal analysis can
produce no prediction as to the long-run tendency of the
rate of profits Thus, for instance, Taussig takes a
completely agnostic positionj

The more * capitalistic* application of
labor • . « may be effective at the same
rate, or at an increasing rate, or at a
decreasing rate. The outcome depends on
the progress of invention, oonoerning
whioh no rule can be laid down«2

Accordingly, whether the rate of profit will

rise, fall, or remain constant " depends on a race between

la J, B, Clark, The Distribution of Wealth , pp. 183-
186, italics minse

2o F« Taussig, Prinoi-ples of Economics (New York, 1911) i
II, 12o

118

accumula -t-.^nn ant^ jTmprovement."

These Ricardlan and neo-classical theories
are essentially contradictory to Marx's analysis- of the
rate of profit. Marx criticized Ricardo on the grounds
that, unwilling to regard capitalism as posessing an
immanent barrier hut recognizing the existence of such
a barrier in the falling rate of profit, he ascribes
this tendency "not to production but to nature." Marx
therefore rejects the duality between the "natural"
tendency to diminishing returns and the human faculty
of invention, the counterposition of "Increase in
Capital'' to "Inventions and Improvements, ""^ the notion
of "a race between accumulation and improvement." On the
contrary, Marx maintains, "Accumulation itself, and the
concentration of capital that goes with it, is a material
means of increasing productivity . , . the development
of capitalist production and accumulation lifts the
processes of labor to a higher scale." Thus, in the
Marxian view, accumulation of capital and increasing
productivity are expressions of a single process.

1. Taussig, OP. cit o. II, 2?.

2. Capital, III, 283.

3. J. H. Hicks, Theory of Wages (London, 1932), p. 11^.
if. Cat)ital . Ill, 256.

119

The most fundamental difference between the
Marxian and neo-olassioal theories, however, is this?
Under the neo«olassical assunrptions the rate of profit
will tend to fall only if the marginal physical pro-
ductivity of capital tends to decrease «. Marx, on the
other hand, not only does not hase his theory of the
falling tendency of the rate of profit on the expeo«
tation that the marginal productivity of capital Jwill
decrease, he derives his theory on the explicit assump*-
tion of a relationship between capital stock and output that
can be termed a historically increasing marginal pro-
ductivity of capital, although Marx, of course, did not
use this concept!

Although a machine becomes absolutely dsarsr
with the growth of its bodily mass, it be-
comes relatively cheaper. If five laborers
produce ten times as many commodities as
formerly, thiff does not increase the outlay
for fixed capital tenfold; although the
value of this part of the constant capital
increases with the development of produe-*
tivity» it does not by any means increase
in the same proportion .^

In the Marxian system, a declining marginal

productivity of capital will^ of course, produce a sharply

falling rate of profit. What is crucial is that Marx

deduces the same tendency of the rate of profit to fall

on a basis vjhich admits, indeed assumes, a rising

1, Capital s III, 305, italics mine,

120

marginal productivity of capital© The seemingly
paradoxical nature of this proposition illust]?ates
how completely the Marxian theory of the falling tend-
ency of the rate of profit is bound up with the labor
theory of value, under vrhich value, profit, and capital
are strictly social terms, expressed in homogeneous unite
of abstract labor«time, so that the increasing total
productivity with capital accumulation implies the de-
creasing value of the individual unit of product and the
stability of the valae of the total net product of a
working day of given lengths no matter how rapidly its
mass may increase o

Marx is sufficiently explicit on this point
that his doctrines have seldom been interpreted in a
decreasing marginal productivity sense « A notable ex-
ception, hovxever, is the atten5)t of H. Do Dickinson to
establish the validity of Marx's theory o Since Dickin-
son makes the key assun^tion that "produet-per^head
increases with capital-per-head but less than propor-
tionally"^ it is, of course, scarcely surprising
that he can claim at the end "Thus on certain broad and
reasonable assumptions regarding the relation between

1, Ho D, Dickinson, "The Falling Rate of Profit in
Marxian Economies,'' Review of Economic Studies > February,
1957.

2» Ibid., p. 126»

121

the organic composition of capital and the physical
productivity of lahor, the general correctness of Marz*s
theory o « . appears to be demonstrated,"

Far more frequently » however, Marx's theories
have been presented as essentially underoonsumptionist*
Thus Keynes vie?/ed Marz as one of the inhabitants (x'Jith
Major Douglas and Silvio G^sell) of an underoonsun^-
tionist "underworld" in which the insights of Malthus
were kept alive during the heyday of "classical econom-
ics*"

Malthus had argued that Adam Smith was on the

right track in attributing the falling rate of profit

to the effects of "competition*" He accepted Ricardo's

analysis of diminishing returns in agriculture, based as

it was on his own theory of population, but regained

this as merely the "limiting," not the "regulating,"

factor governing the rate of profit!

In the cultivation of land, the cause of
the necessary diminution of profits is the
diminution in the quantity of produce ob-
tained by the same quantity of labor* In
manufacture and commerce, it is the fall
in the exchangeable value of the same
amount of produce .2

What in Adam Smith was In^jlicit was made explicit
by Malthus - this fall in prices is due to the lack of

1, Dickinson, loo» clt «, p. 129.

2« T. R. Malthus, Principles of Political Economy (New
rork, 1951), p. 275-

122

sufficient "effective demand";

I fiannot by any means agree with you in
your observation tliat 'the desire of aoou-
mulation will occasion demand Just as
effectually ag a desire to consume' and
that • oonsuniption and accumulation equally
promote demando' I confess indeed that I
know no other cause for the fall of profits
which I believe you vrill allow generally
takes place, from accumulation than that the
price of produce falls compared with the
e3Cpense of produotlon^ or in other wordSn
that the effective demand is diminishedo

In rejecting "Say's Law" Malthus thus made

effective demand depend, not on production, but on a

subjective factor, the community's propensity to consumes

A nation must certainly have the power of
purchasing all that it produces, but I can
easily conceive it not to have the will©^

IThis *will," Malthus maintained, found its in-
carnation in the class of "unproductive consumers^ -
landlords, churchmen^ soldiers, government officials,
et al p, — whose activities served only to maintain aggre-
gate demand without adding in any way to supply?

There must therefore be a considerable
class of persons who have both the will
and power to consume more materiel wealth
than they produce, or the mercantile
classes could not continue profitably to
produce so much more than they consume* 3

lo Malthus, Letter to Ricardo, in Ricardo, Collected
Writings and Corres-pondence « VI, 132*

2a Malthus, in ibid., p. 1^1,

3* Malthus, Principles « p« ^0*

125

An squilibrium growth path, moreover, could only

be maintained on condition of a continual increase in

this type of consumption:

Under all common circumstances j if an
Increased power of production be not
accompanied by an Increase of unpro~
duotive e3cpenditures J it will inevita-
bly lower profits and throX'J labourers
out of employment <,!

This Malthusian conclusion is but a shade

removed from Keynes ' dictum:

Pyramid-building, earthquakes, even wars
may serve to increase wealth, if the
education of our statesmen on the prin-
ciples of the classical economics stands
in the way of anything better* 2

Keynes considered the falling rate of profit an

accomplished facts

Today and presumably for the future the
schedule of the marginal efficiency of
capital is, for a variety of reasonSi,
much lower than it was in the nineteenth
century <> 3

Hia explanation was, by legitimate avowal, essentifilly

a development and sophistication of the Malthusian

theory. Like Adam Smith and Mai thus, Keynes believed

that as capital became "abundant" its profitability would

have to fall:

lo Malthus, Letter to Ricardo, in Ricardo, op» cit o« IX, 10,

2. J, M, Keynes, G-eneral Theory of Employment, Interest
and Money (New York, 1936), p. 129.

3«> Ibid o , p. 308.

124

It is much preferable to speak of C5apital
as having a yield over the course of Its
life in excess of its original cost than
as Taeing productive o . « » If capital "be-
comes less scarce 9 the excess yield will
diminish, without Its having becom© less
productive - at least in the physical
sense*^

The failure of effective demand to keep up with
capital accumulation follows from Keynes' proposition
that "the marginal propensity to consume Eie] weaker in
a wealthy community o" One of the main factors detei^
mining the Keynesian Marginal Efficiency of Capital
schedule J however, is the entrepreneurial expectation
regarding "the strength of effective demand from time to
time during the life of the investment under considera-
tiono"5 Thus the tendency of the propensity to save to
exceed planned investment continually exercises a
depressing influence both on the profitability of exist-
ing capital and on the marginal efficiency schedule?

An act of individual saving means - so
to speak - a decision not to have dinner
today. But it does net necessitate a
decision to have dinner or to buy a pair
of boots a week hence or a year hencej
or to consume any specified thing at any
specified date. Thus it depresses
the business of preparing today's dinner

1» Jo M, Keynes, op« cit <,« p. 213.
2» Ibid., p. 31.
3» Ibid . . p. Iky*

125

Without stimulating the "business of
making ready for some future act of
consuntptiono It is not a substitution
of future consumption-demand for pre-
sent consumption-demand - it is a net
diminution of such demand. Moreover,
the expectation of future consumption
is so largely based on current experience
of present consumption that a reduction
in the latter is likely to depress the
former, with the result that the act of
saving will not merely depress the price
of consumption goods and leave the margi-
nal efficiency of existing capital unaf-
fected, hut may actually tend to depress
the latter also»^

Marx has one decisive doctrinal point in common
with Malthus, Keynes, and all other underconsumptionists •
the rejection of "Say's Law." Thus all these economists
are at least not blinded by theoretical "objections to
the obvious phenomena of overproduction (phenomena
which do not pay any attention to these objections)."

But this is merely the posing of the issue.
G-iven the fact of periodic overproduction, the real
question is whether these phenomena are "cause" or
"effect" - whether the fall in the rate of profit is
due to tendencies toward underconsumption or, on the
contrary, whether the periodic or even persistent failure
of effective demand is to be explained by factors en-
tirely within the domain of production. As we have seen,
Marx's derivation of the falling tendency of the rate of

1. Keynes, op. cit ., p. 210.
2e Capital . Ill, 302.

126

profit on the basis that "less labor is employed in

proportion to tbe employed capital""^ adheres strictly

to the latter approacho The question remains? to what

extent la the undercomsumptlonlst approach compatible

with the Marxian model?

Marx himself ejcplieltly rejected all the variants

of underoonsumptlonlsm with v;hloh he xfas famlHaro Thus

In reply to Adam Smith's explanation of the falling rate

of profit J he stated that "the fall In the rate of profit

calls forth the competitive struggle among oapltallstSj

not vice-versa. To be sure, the competitive struggle

le acconrpanled by a transient rise in wages and a re-

sultant further temporary fall of the rate of profit •"

For the idea of "unproductive consuEptlon, "
Marx had merely a contemptuous reference to "the phan-
tastio idea of the priest Chalmers that the capitalists
pocket so much more profits, the smaller the quantity
of the annual product expended by them as capital. The
state church then comes to their assistance in order to
help them to consume the greater part of the surplus-
product instead of capitalising it«"^

Finally, Marx made the point that if the

lo Oapital , III, 288,
2» Ibid., p. 301»
3o Ibid., p. 288,

^ s^ 127

>^:

phenomena of overproduction are ascribed to a distri-
bution of income excessively skewed in favor of the
capitalists, this is in effect an outright oontradiotlon
of the falling tendency of the rate of profits

Other economists, for exaciple Wakefield,
flee to consideration of the field of
employment ^ for growing capitals « This
belongs in the discussion of competition j
and is much more a matter of the diffi-
culty for capital to realize an increasing
profit; thus" denying the Immanent tendency
toward a fall in the rate of profit ed

Those economists who, like Sweezy and Joan
Robinson, maintain that Marx was, at least in part* an
underccnsumptionist, have no difficulty in findAng
numerous citations j above all in Volume IIIj referring
to the fundamental contradiction "between the limited
conditions of consunrntlon on a c^italist basis and a
production which forever tends to exceed its immanent
barriers."^ But, as Mrs, Robinson is keenly aware^ over-
production cannot be eseplained by its synonym, undercon"
sunption. It is essential to demonstrate how tendencies
toward underconsumption cripple the ''inducement to invest"
and thus cause crises:

1, In English in the original,

g, Karl tSarx, G-rundrisse der Kritlk der polltlsohen
O ^onomie (Rohentimrf) (Berllnt 1953) > P« 6^, cited in
Gusten, opn cJLt»> p. 29,

3* Capital « III, 301.

S '■ ^ 128

Thus to clinch the argument it is neces-
sary to show . e . that the rate of profit
depends, in the last resort, upon consuming
power* It is necessary, in short, to supply
a theory of the rate of profit "based on the
principle of effective demand.

This Marx fails to do, for he had mean-
while worked out his theory of the falling
tendency of profit, based on the principle
of the rising organic composition of capital.
In Volume III this theory is inextricably
mixed up with the underconsumption theory,
and the two lines of thought are not brought
into any clear relation with each other.
The theory of the falling rate of profit is
a red herring across the trail, and prevented
Marx from running the theory of effective
demand to earth.

Marx evidently failed to realize haw
much the orthodox theory stands and falls
with Say's Law, and set himself the task of
discovering a theory of crises which would
apply to a world in which Say's Law was ful-
filled, as well as the theory which arises
when Say's Law is exploded. This dualism
implants confusion in Marx's own argument,
and, still more, in the arguments of his
successors .i

Joan Robinson's proposition that Marx derived

the falling tendency of the rate of profit in terms of

"a world in which Say's Law was fulfilled" (concurred in

u
by (xusten - "Marx deduced the law of the falling tendency

of the rate of profit under the assumption that Say's

Law of Markets is valid. Although Marx was among the

earliest and sharpest critics of this theorem, for his

long-run theory he waived all arguments based on deficient

effective demand,") provides an approach by which a

1. Robinson, Essay , pp. ^^-S"^'
2c Gusten, op. cit *, p. 3o<»

129

clearer understanding of Marx^s relationship to
undereonsumptionism can be gainedo

Marx definitely assumed that, under normal
circumstancesj capitalists would be able to realize on
the market all the "value," including the surplus-value,
contained in the total social product o " Periodically ,"
to be sure, "too many commodities are produced to permit
of the realization of the value and sujrplus-value con-
tained in them under the conditions of distribution and
consumption peculiar to capitalist production, that is,
too many to permit of the continuation of this process
without ever recurring explosions o"

But this situation is merely an aspect of
periodic orisess one of the ways in which the "slaugh-
tering of the values of capitals" is effected* As such
it is strictly effect, not cause© The falling tendency
of the rate of profit, as a fundamental long-term "law"
of the Marxian model, applies precisely to the normal
situation in which effective demand Is sufficient for
the realization of all the value embodied in the
commodity product, and not to the moments of '•periodically
recurring explosion. •*

Does this, however, mean that Marx in practice
accepts Say^s Law? To answer we must be clear as to

lo Oa-pital , III, 303»

>0i

130

precisely what Say 'a Law itself means o For this purpose

the most exact formulation is undoubtedly that of Keynes S

The classical theory assumes, in other
words, that the aggregate demand price
(or proeseds) always aonoraodates itself
to the aggregate supply price. . . o^.

Once Say* 3 Law is correctly formulated, its
essential difference from the Marxian assumption should
he strikingly clear. Say's Law asserts the equality of
an esc post magnitude, "proceeds," to an e x ante schedule,
"aggregate supply prioso" Marx, however, states the
identity of proceeds and aggregate value « and both of
these are ex post magnitudes o This identity is thus of
essentially the same nature as the Keynesian identity
between savings and investment©

The "aggregate supply price" schedule in Marx
is the same as in all classical and neo-classical econom-
Icsj the cost of production of each output plus the
given rate of return on the capital involved^ But this
rate of return is given as the prevailing average in
the immediate past. If the falling tendency of the rate
of profit is in operation, the realized rate of return
based on the identity of proceeds with aggregate value
must be less than this "given" expected rate of profit,
and thus the effective demand must be less than the

1, Keynes, opo oit »» p. 26.

131

aggregate aupply prio3 o

Looked at from the angle of "effective demand"
vjhat this means is that capitalists seek to sell their
goods on the market for an aggregate price (in labor-
units) that will include enough profit to allow them the
same return on invested capital that they hare been able
to gain in the immediately preceding period. Es hy-
pothesi s however, tliis is excluded, since the commodities
produced contain an insufficient amount of surplus«value©
The capitalists would therefore have to sell their products
for less value than they had expected to receive in
order to dispose of them alio The products would be
sold at their aggregate value « but this aggregate value
is less than their aggregate price of production ex
ante * The difference between the two aggregates will
appear to be "deficient effective demands"

Accordingly, far from being deduced under the
assumption that Say's Law is valid, Marx's law of the
falling tendency of the rate of profit is directly and
completely contradictory to Say's Law - but in a clearly
defined way* The rate of profit does not fall because
there is not enough effective demand; on the contrary,
there is deficient effective demand because the rate of
profit is falling . The essential meaning of overpro-
duction is "production of too many means of production
and necessaries of life to permit of their serving as

V ' f

132

means for the exploitation of laborers at a certain rate

of profit s "^

Mars is therefore not at all inconsistent in
rejecting both Say's Law and underconsumptionismo The
basis for his critique of capitalism is not undercon-
sumptions it is underoroduotion e "It is not a fact that
too many necessities of life are produced in proportion
to the existing populatlono The ^•everse is true. Not
enough is produced to satisfy the wants of the great
mass decently and humanely o"^ The phenomenon of
"periodical overproduction of wealth in its capitalistic
and self«oontradlctory form*'-^ is to Inarx essentially the
surface sign of the underlying barrier to the capitalist
mode of production, manifested concretely in the falling
tendency of the rate of profit which itself testifies
that "the real barrier of capitalist production is cap-
ital Itselfe"^

The Incompatibility of underoonsumptionism with
the main body of the Marxian system is legitimately a
matter of slight concern to Joan Robinson, since She

le Capital , III, 303> italics mine*

2« Capital , III, 302©

3, Ibid ., p. 303*

/^. Ibid . , p. 293*

X ry' 133

discards the Isasio unifying principle of that system,
quantification in units of labor-time. For Sweezyj
who professes to accept and defend the Marxian value
theory, this cannot be the oase» Therefore, if he is
to bring in tinderconsuniptionisui in order to "supplement
his EMarz's] work at a point where it is incomplete,"
this critic of Marz must, in terms of the basic cate-
gories of the Marxian system, "demonstrate that capi«
talism has an inherent tendency to expand the capacity
to produce consumption goods more rapidly than the
demand for eonsunrption goods »'*

Sweezy seeks to prove this through the argument
that over time a steadily increasing proportion of the
social product tends to be invested in means of pro^
duction, so that "the ratio of the rate of growth of
consumption to the rate of growth of means of production
declines."^ He then argues that the proportion between
the stock of means of production and the output of con-
sumption goods tends to remain constant, so that "the
ratio of the rate of grov/th in the output of consumption
goods to the rate of growth of means of production reoains
constant," and therefor© "there is an inherent tendency
for consumption to lag behind the output of consumption

a • o

1« Sweezy, op» oit oi p. 180.
2o Ibid., po I52e

-V

a ' 12*

goods «"^

It lias been pointed out ^ several critics that
the assumption of a constant proportion between the total
stock of means of production and the output of consump-
tion goods lacks any foundation whatsoever*^ More sig«
nificantj this assumption is quite inconsistent with
the proposition that an increasing proportion of the
social product will consist of investment goodSo

An analysis of Sv/eezy's attenipt at a rigorous
algebraic "proof" of the underconsumption thesis Is
nevertheless relevant, sines it esqposes his basic error
much more clearly, and shows that if this error is cor-
rected a very different conclusion emerges o

Sweezy develops his argument on the basis of a
model suggested by the Austrian Social-Democratic
theorist Otto Bauer. He starts by defining national
income per unit period of time in value terms (I) as
made up of variable capital (w) , surplus-value consumed
(1), and surplus-value accumulated (k). Thus
do) 1= w-t- 1 •^ k

1« Sweezy, op* cit «> po 183«

2» Of. Abba P. Lerner, "Marxism and Economics," in
Journal of Political Economy , March 19^5 i P. 83: "output
is not the same as consumption . It includes not merely
consumption but also the output of additions to equipment
and to stocks of goods in process. Sweezy appears to have
been much too dazed by the whirl of different ratios to
notice thiSo"

V 135

He makes the assumption that I and all Its
components increase steadily j that workers have a oon">
stant unitary marginal propensity to consume while
capitalists' J^O is fractional and decliningj and that
the organic composition of capital is rising ("accumu-
lation rises as a proportion of surplus-value and
investment rises as a proportion of accumulationo")
Accordingly both w and 1 can be considered functions of

(2«) w= f(k) such that 0<f»(k)<l andf'»(ls)<0

and
(3.) 1= 0(k) such that 0<gf»<3!:)<l and0'««(k)<O^

Sweezy then makes the key assumption that "the
technically determined relation between the stock of
means of production and output of consumption goods re-
mains constant" so that "investment is proportional to
the increase in consumption goods output. Hence if the
increase in consumption in the time dt is dw + d^j, there
will be required an addition to means of production, say
c, such that> where A. is the factor of proportionality

lo Sweezy, op . cit » » p« 181 «

2, The mathematics here is somewhat sloppy, _For w and
1 always to grow less rapidly than k, ^ and ^ should
always be less than unitj^ry, so that ineaualiffes (2) and
(3) should be 0<f»(k)<| and 0<^»(k)<jj^ jhis, how-
ever, does not affect the further argument*

136

ik.) o= MdN •<• dl) "^ C)

On this basis Sweezy proceeds to his demonstra-
tion th§,t 0, ''the rate of investment required by the
growth of consumption," must behave in contradictory
fashion to k "the rate of investment dictated by the
typical capitalist behavior pattern,''^ the contradiction

do i^ dk
to be proven by ■3=5 =v -^

From the previous equations, he derives

dt" ^VdF--dt2

and
(60) |2i=Cf'(k)+ (2f'(k)+ 13^+ [f"(l:) *iz^"(k)lf^)

(5«) 7?- Ax^-t;^,

,^-^ = UX-^iS/ T 10- \X^) T XJ i^T- 1.1 • \2S.; . iw va.^ -"lat/

On the assumption that the absolute increase in
national income per* unit period of time is constant or
decreasing, 'J?<^ ' ^* follows from the above that
(7 ) ^ ^/O

so that
(80) ^<o

However it is also evident that

"Taken together" Sweezy triumphantly concludes,

1. Sweezy, op« eit «, p. 188

2. Ibid.

137

"(8) and (9) indicate a contradiction. Capitalists tend
to increase the rate of investment f"a;5>o) trnt the way
they allow consumption to grow warrants only a declinlr®
rate of investment ('rf ^^Oj,"

This "proof," alas, rests on a monstrous piece
of confusiono Sweezy^s definitions and assumptions are
all In value terras - "but suddenly, with equation (^)5
he switches into " real " quantities, "means of production"
and "consumption goods," without revealing the slightest
awareness of what he has done; and what he has done is,
quite simply, to make nonsense out of his whole argumento

If the organic composition of capital is rising,
X,9 aa the relationship between the increase in the valine
of the output of Department II and the increase in the
capital stock required to permit this expansion, cannot
possibly he constant - it must continually increase ^
Moreover it must increase by a larger amount in every
successive period of time under Sweezy^s assun^stion that
"investment" rises as a percentage of "accumulation"

(ioe., if Q, (y(^^^. B>-^ Increases with time, and i-±

1 + j£

1« Sweezy, op> cit .« p. 189»

2. Therefore even in "real" terms and even accepting
Sweezy' 8 assumption of a constant ratio between output
and means ef uroduction, ^ cannot remain constant unless
the proportional division of means of production between
the sectors also remains constant, contradicting the prior
aeeumption.

138

decreases with time, then _2Lj & function of the change
in J must increase still more.) Thus dA ->Q and

dr^ N. are necessary implications of Sweezy's own model
andj in addition, d?\ is an increasing function of k:

Consequently a proper analysis of Sweezy^s model

leads to the correct equation:

(5a) ^=\/^_«.^W f^^

dt /^[at^ dt^/ ^'«(k) l^dt ^

It is clear that ^ is not necessarily negative^
since the second term of the equation is always positive
and may well have absolute value greater than the first
term. The contradiction "proven" by Sweezy disappears,
as was to he expected once it was revealed to be the
simple consequence of Sweezy 's contradictory assumptions
regarding the organic composition of capital*

Equation (5a) in fact leads to conclusions
very different from those claimed by Sweezy. It can

be shown that there must exist values of Ts. such that

dc dk

'^*--— - « ioSo, all real roots of the equations

dt dt

(10,:) dl / l>-^»(3c)Lft(k) ^ gf»(k)] \ _>/A _ dgjr\

dt \ f«(K) -K^Mk) + 1 / '^Vdt^ dt7
Sweezy 's method of "establishing the tendency
to underooneumption" thus tends to prove the very opposite
- the thesis of Tugan-Baranovsky that "given a proportional

139

aiBtrlbution of social production" there can be no
general underconaumptione

The essential point is that it is k, the actual
investments that equilibrates production and oonsunrptiono
The excursion into under consuroptionism serves again to
show that, in the Marxian model, the critical factor is
the incentive to invest a and that in this model over-
production results from but does not cause insufficient
investment o The strategic variables remain those
determining the rate of profit from within the sphere of
production-relations. Underconsumption cannot be brought
to the aid of Marx's critique of capitalism without
exploding hie system and substituting for it an essen-
tially different type of economic analysis*

1« Quoted in Sweezy, op« oit .> Pc I69.

140

CHAPTER V
THEORETICAL CRITICISMS OF THE LAW

An attack on the theoretical validity of the law
of the falling tendency of the rate of profit from vithin
the basic postulates of the Marxian system can he based
on only two grounds: it can be argued that Marx was
wrong to contend that capitalist development necessarily
involved a rising organic composition of capital; or,
granting that as an assumption, it can be argued that a
rising organic composition of capital does not necessarily
result in a falling rate of profit, since the increase in
relative surplus -value stemming from the increased pro-
ductivity of labor may be sufficient to compehsate for
the increasing organic composition, producing a constant
or even a rising rate of profit.

In evaluating these criticisms we will begin with
the latter. The Marxian expectation of a steadily rising
organic composition of capital is thus to be taken, as a
valid assumption for this part of the discussion. In
the next stage the legitimacy of the basic proposition
itself will be discussed.

Relative surplus -value as compensation
for the rise in organic composition

As we have seen, in Marx's derivation of the

141

falling rate of profit the rate of exploitation is as-
sumed to remain constant, so that:

dt Q^(lt>s') dt
In her critique of Marx, Joan Robinson maintains
that this argument is inconsistent, incorrect, and at
best tautological:

Marx's law of the falling tendency of profits
+-.>ien consists sj.mply in the tautology: when
the rate of exploitation is constant, the rate
of profit falls as capital per man increases.
Marx can only demonstrate a falling tendency
in profits by abandoning his argxament that
real wages tend to be constant. This drastic
inconsistency he seems to have overlooked.

Marx's theory, as we have seen, rests on the
assumption of a constant rate of exploitation.
Certain causes which may lead to a rise in the
rate of exploitation he treats as offsetting
tendencies. ... To these tendencies, which
all help to raise the rate of exploitation,
there are obvious limits and Marx argues that
they cannot be sufficiently strong to offset
the falling tendency of the rate of profit.
This may be readily admitted. But the rise
in the rate of exploitation which comes about
through a rise in productivity, with constant
hours and intensity of work, and constant real
wages, is not limited in the same way. Pro;
ductivity may rise without limit, a nd, if real
wages are constant, the rate of exploitation
rises with it .i^

In Chapter I we showed that Marx, far from arguing
that "real wages tend to be constant," allows theoreti-
cally for a rising tendency of the real wage. 3 The re-

1. Robinson, Essay , p. 36.

2. Ibid . . p. 38.

3. Cf. supra , ch. II, pp. 47-57.

142

proach of "inconsistency" is thus entirely based on the
common misconception of Marx's theory of wages.

Is it, moreover, justified to state that Marx's
theory of the falling rate of profit "rests on the as-
sumption of a constant rate of exploitation?" Mrs.
Robinson herself recognizes, in a different context,
that this theory is "based on the principle of the rising
organic composition of capital. "^ On many occasions Marx
makes it very clear that he believes his prediction of a
falling rate of profit to be entirely compatible with a
rising rate of exploitation. For instance, virtually at
the beginning of his exposition, he writes:

The law of the falling tendency of the rate of
profit, which is the expression of the same, or
even of a higher, rate of surplus -value, says
in so many words: Since the aggregate mass of
the living labor operating the means of produc-
tion decreases in comparison to the value of
these means of production, it follows that the
unpaid labor, and that portion of value in
which it is expressed, must decline as compared
to the value of the advanced total capital. Or,
an ever smaller aliquot part of the invested
total capital is converted into living labor,
and this capital absorbs in proportion to its
magnitude less and less surplus -labor, although
the proportion of the unpaid part of the em-
ployed labor may simultaneously grow as com-
pared with the paid part.^

Marx is therefore neither inconsistent nor tauto-
logical - the crucial point, however, is whether he is

1. Robinson, Essay, p. 50.

2. Capital . Ill, 252.

143

correct in claiming that increases in the rate of ex-
ploitation resulting from the higher productivity of
labor cannot systematically raise the rate of exploita-
tion enough to compensate for the increase in the organic
composition of capital.

Sweezy charges that this claim is completely
unfounded :

If both the organic composition of capital
and the rate of surplus -value are assumed
variable, as ve think they should be, then
the direction in which the rate of profit
vill change becomes indeterminate. All ve
can say is that the rate of profit vill fall
if the percentage increase in the rate of
surplus-value is less than the percentage
decrease in the proportion of variable to
total capita l.l

1. Sveezy, ov. cit .. p. 102. In his ovn formulation of
the question Sveezy falls into hopeless confusion. His
definition of the organic composition of capital is

q = c and the rate of profit p' = s'q' (q»=l— q = r^J
^ ofv °*^

This is, on its face, meaningless since the symbols used
stand for f lev variables, and the rate of profit is based
on the stock of invested capital. But in any case it is
impossible to make sense of the formula q' » 1 — q, since
the algebraic operation can be performed only if c-fv is

c*v
identically equal to unity, and as ve have seen this can
never be the case, since the tvo "v's" represent different
quantities: the v" in the numerator stands for the living
labor-pover entering into the commodity-product, while the
"v" in the denominator represents merely the infinitesimal
"stock of variable capital."

144

It is not possible to demonstrate a falling
tendency of the rate of profit by beginning
the analysis with the rising organic compo-
sition of capital. 1

Marx, of course, was veil aware of this objection,
and attempted to answer it. His refutation was based on
the existence of an absolute limit to the amount of
surplus-value that any given number of workers couM

produce:

To the extent that the development of produc-
tivity reduces the paid portion of the em-
ployed labor, it raises the stirplus- value by
raising its rate; but to the extent that it
reduces the total mass of labor employed by
a certain capital, it reduces the numerical
factor by which the rate of stirplus -value is
multiplied in order to calculate its mass.
Two "laborers, each working twelve hours daily,
cannot produce the same mass of surplus-value
as 24 laborers each working only two hours,
even if they could live on air and did not
have to work for themselves at all. In this
respect, then, the compensation of the reduc-
tion in the number of laborers by means of an
intensification of exploitation has certain
impassible limits. It may, for this reason,
check the fall of the rate gf profit, but
cannot prevent it entirely. '^

1. Sweezy, op. cit ., p. IO5. Though Maurice Dobb, more
than Sweezy, is concerned about demonstrating his ortho-
doxy, he comes to substantially the same conclusion:
"That [Marx] provided no a priori proof that one set of
influences would dominate the other was an omission which,
I believe, was . . . made advisedly because it would have
been alien to his whole historical method to suggest that
any answer could be abstractly given." (Political Eco^omy
anri Haoitalism [New York, 19^0], p. 109).

2. Capital . Ill, 290.

145

Marx uses an extreme example, and, moreover, an
unclear one, since he does not state whether the two
hours worked by each of the 24 laborers represents their
surplus working time or their total working time (and if
the latter, at what rate of surplus -value are they work-
ing? Do they also "live on air^'?)o

His basic point, nonetheless, is a simple one
and quite plausible. The rate of profit is a ratio be-
tween two co-ordinate variables, surplus -value per man
and capital invested per man. The first of these has
an "impassible limit" - the duration of the working day.
The second, however, has no finite limit - in a com-
pletely automated economy it would approach infinity.
As the two variables approach their limits the ratio be-
tween them must therefore approach zero.

Glisten considers that "this argument is faulty"
because Marx "constructs a linear relationship between
the increase in productivity and the increase in surplus -
value. ""^ This "linear relationship," however, was in no
way implied in the foregoing citation which says nothing
at all about the relation between increases in produc-
tivity and s imp lus- value. The weakness is nevertheless
a real one: even though there must always be a potential
increase in Q, large enough to decrease £i whatever the

1. Giisten, op. cit ., p. 40 »

146

change in sj_, It does not follow that as g, increases to

this value pj. must fall steadily and syst ematically.

Marx's basis for expecting this steady fall was

stated most explicitly in a passage from the rough draft

of Capital ;

The greater the surplus -value appropriated hy
capital because of the augmented productivity
... or the smaller the already established
fraction of the working day which provides an
equivalent for the workers, so much the smaller
is the increase in s\irplus -value which capital
can obtain from an increase in productivity.
Surplus-value increases, but in ever diminish-
ing proportion to productivity. To the extent
that capital is already developed ... so much
the more frightfully must it increase productiv-
ity even to expand (i.e., to increase surplus -
value) by a lessened proportion - because its
barrier always remains the proportion between
the fraction of the day which expresses neces-
sary labor and the entire working -day. Only
within these boundaries can it move.-'-

Rosdolsky maintains that this argument is suffi-
cient to establish Marx's contention, and Gilsten essen-
tially agrees with him, with the proviso that "the rate
of profit must finally fall . . . previously, however,
the rate of profit can also rise over time, since while
the rate of surplus -value is lo\f, s\irplus- value increases
with relative speed. "^ (i.e., if the real wage is con-
stant and s'< 1 . a given percentage increase in produc-
tivity will cause a more-than-proportional increase in

1. "Grundrisse," p. 2^6, cited in Rosdolsky, "Zur Neueren
Kritik des Marxschen Gesetzes der Fallenden Profltrate,"
Kyklos . 1956, p. 221,

2. Gtisten, op. cit ., p. 46.

147

siirplus -value o )

Even here, however, the argiment is seriously in-
complete, since it relates the increase in surplus-value
only to the increase in productivity and not to the in-
crease in the organic composition of capital required to
bring it about. Since, however, Marx assumes in effect
that the "marginal productivity of capital" is an increasing
function of capital per man (ioe., that productivity
increases more than proportionally with organic composi-
tion), s\irplus -value can increase less rapidly than pro-
ductivity while maintaining the same proportion to
capital . The essential problem can only be solved on
the basis of the explicit functional relationship between
surplus -value and organic composition .

This relationship must be conceived strictly in
the long-run sense, abstracting completely from all short
and intermediate term fluctuations. In other words, we
must start with a dynamically stable model, whose para-
meters are assumed to remain constant over timeo

The variables of the system, then, are;

g - The organic composition of capital

s_^- The rate of exploitation

2].- The rate of profit

TT - The index of net labor-productivity

w - The index of real wages

t - Time

148

Its parameters are given by the following basic

assumptions:

(1) Labor -productivity is Increasing continually

and at a constant rate

(2) Relative changes in productivity have a con-
stant and more than proportional relationship to changes

in the organic composition of capital (i.e., 'Mt'the elasti-

city of 17 with respect to Q, ' is constant and exceeds unity.)

(3) Relative changes in the real wage have a
direct, constant, but less than proportional relation-
ship to changes in labor -productivity (i.e., iE is con-
stant, positive, and less than unity).

Thus the.se parameters are

r =

loge Jt
^t-1

u :

sir^i

EQ-^

fe =

^ (0<b<l)

ETT

Prom the assumption u = HT can be derived the

equation expressing productivity as a function of organic
composition:

u = nr - M-S , Tr=T(Q)

EQ dQ T

M = u'"'(0-) r= fuZM dQ

dQ Q - V Q

1. a, of course, is the constant of proportionality based ^ u
on the value of Tf arbitrarily chosen when t = (i.e., a = _£ )

''o

149

This is Marx's long-run "production function," in
which changing technology is the primary determinant of
changes in productivity and must involve under capitalist
conditions the change in social relationships expressed
hy a rising organic composition of capital. Because it
is based on technological change it is irreversible - at
every point in time £ is concGived as having a unique
and determinate value.

Given the values of r, u, and b, and the values
vhen t = of sj. and 2* the value of EJ. at every point of
time is determined.

If s'o s^ and Qq = 9,- then To » ae^ and, since

si, surplus- labor is equivalent to s urplus product ,
necessary^laDor necessary product

IL 1, then Wo « a©}^

^ l+(f

At every time t it follows that

and

oau ^ t)rt
W4. = s-P.. ■ P
t li-cr ^

1. This in no way implies that Marx's short -run model
involves "fixed coefficients." The contrary is the case.
Every single machine has its own unique implicit organic
composition/' depending on the value originally invested
in it; its age, deterioration, and obsolescence; and the
amount of labor required for its operation. Which of
these machines are used to bring about short-run changes
in production is determined through the market.

150

Accordingly the rate of exploitation, s't , is

determined by a9^(lt.^)gi:J: _ l

aeu g brt

s't = (1+Oe^^-^^^^ - i"

Similarly the organic composition of capital,
Qt, is determined by /e^e-"'^

From the basic formula for the rate of profit,
it foliovs that

^ Q(i->-g-)e ^t(u^i-buj .

From this it is easy to derive the rate of change
of 2l ^■■t every point in time _

.,. ■ M-.un...e(i-b)rt^ait.)eU-^)^t^i] £^g;m

dt 9 (i.,o.)gr, t(u-hl-bu)

dgj r- r[.u('l"'b^

u9d+a-)££iiiillz^

It is evident that the condition for a falling
tendency of the rate of profit, ^<0 , ^^ simply

1— b^

The conclusion of this analysis is that, despite
Sweesy's discovery that "It is not possible to demonstrate
a falling tendency of the rate of profit by beginning the

151

analysis with the rising organic composition of capital,"

Marx vas completely justified in his derivation of a

falling rate of profit from a rising organic composition

of capital. When Marx vrote it was generally accepted

as an empirical fact that the rate of profit had tended

to fall: accordingly it was legitimate to assume that

the inequality ?..'- > u already prevailed. Since b and

1— h ^
u are parameters of the system, changes in this inequality

depend on changes in si. But if s • is to decrease over

time this requires that b>'l, so that d^J. must always he

negative, while if s' increases the inequality must in-
crease.

Consequently Marx's prediction of a falling rate
of profit is the necessary expression of his basic pro-
position: that the rising organic composition of capital
is " but another expression for the incre ased productivity
of labor . "•*• It is thus the tendency of the organic compo-
sition, not of the rate of exploitation, that is the de-
cisive theoretical test of Marx's argument.

Must the organic composition of ca pital increase?

Since, from a theoretical standpoint, the falling
rate of profit depends entirely on the rising organic com-
position of capital, the crucial argximents against Marx's
theory are those which challenge the rising tendency of

1. Capital . Ill, 253.

152

the organic composition.

The starting point of these criticisms is that
Marx merely proclaims that Q must tend to rise, hut pro-
vides no reason vhy this must be so. Thus Hans Peter

writes:

The increase of Droductivity must no¥ come to
expression in the rise of Q. No reasons vill
he given for this proposition - it will merely
he continually repeated.-^

Marx himself, moreover, seems in at least one
place to admit that this is the case:

Considered abstractly, the rate of profit may
remain the same, even though the price of the
individual commodity may fall as a result of
an increase in the productivity of labor and
a simultaneous increase in the number of these
cheaper commodities, for instance, if the in-
crease in the productivity of labor extended
its effects uniformly and simultaneously to all
the elements of the commodities, so that the
total price of the commodities would fall in
the same proportion in which the productivity
of labor would increase, while on the other
hand the mutual relations of the different
elements of the price of commodities would
ren^in the same. The rate of profit might
even rise, if a rise in the rate of surplus -
value were accompanied by a considerable re-
duction in the value of the elements of con-
stant, and particularly of fixed, capital.
But, in reality, as we have seen, the rate of
profit will fall in the long run.^

Giisten's reproach to this passage can hardly be
disputed:

1. H. PfttftT^. Elnfiihrung in die ool itische Okonomie»
Stuttgart, 1950, p. 106, cited in Gtlsten, PPt cit»> P* 2b n.

2. Capital , III, 269 (German edition, p. 258).

153

But this casual remark, 'as ve have seen,' is
not correct since, as Peter rightly observed,
only the continually repeated assertion of a
rising organic composition is to be found in
the foregoing sections. At the decisive moment
in his argument it ill becomes a theoretician
of Marx's stature to appeal to 'reality' as
against 'abstract consideration, '•'■

The essence of the matter is stated clearly by

Gilsten:

In the long run Q vill increase only if pro-
ductivity in the producer goods industries
increases more slovly than capital intensity
(a technical composition) .^

The crucial problem, to which Marx failed to

give a systematic solution, is therefore to show the

immanent necessity for a rising tendency of the ratio,

in "real" terms, between means of production and net

output .

Marx's attempts, mainly in Theorien iiber den
Mehrwert . to demonstrate such a tendency, amounted es-
sentially to the contention that the increase of pro-
ductivity in the sectors dependent on nat\iral conditions,
such as agriculture, lags behind the increase of produc-
tivity in industry.

Giis ten's critique of this line of reasoning is
conclusive: an argument based on such a "lag" is itself
subject to all the argtmients raised by Marx against the

1. Giisten, op^ cit ., p. 56.

2. Ibid ., p. 52.

154

Rlcardlan theory of the falling rate of profit, notably
that it constitutes a "flight from economics . . . into
organic chemistry."^ Moreover, even granting this lag,
the organic composition of capital will not increase un-
less the increase of productivity in those sectors is
also less than the increase of technical composition in

them .

Does this, however, mean that Giisten is justified
in writing that since Marx "admits in somewhat concealed
fashion that this evolution Ltechnical progress] need not
lead to a rising organic composition if the increase of
productivity is everywhere equivalent . , . therewith
collapses the thesis that the rise in the organic compo-
sition is 'but another expression for the rising produc-
tivity of labor '"?2

This judgment is valid only if it can be shown
that "neutral" technological progress, in the sense of a
constant ratio between means of production and output, is
a theoretically possible case in the Marxian model. -^
Though Marx, as we have seen, nowhere presents a proof
that technological progress under capitalism must be
"capital-using" rather than "capital-saving" or "neutral,"

1, Grundrisse, p. 639, cited in Gtlsten, 02.i_cit., p. 58.

2, Giisten, op. cit ., p. 59.

3 Non-neutral progress of the "capital- saving" variety
cannot be possible if neutral progress is itself impossible ,
("Means of production" here denotes only fixed capital.)

155

he at least indicates two lines of argument which can
serve to establish this crucial point.

The first of these, which Giisten develops ex-
tensively in a different context, his discussion of
Joan Robinson's theory of economic growth,-^ rests on
Marx's theory of the role of the industrial reserve army.
The existence of the "s\irplus laboring population" is,
according to Marx, "a condition of existence of the capi-
talist mode of production."^ The reserve army is neces-
sary to capitalism because without it no rapid expansion
of production would ever be possible without creating a
situation of over-full employment in which wages woulxd
rise so rapidly as to reduce surplus -value: without the
reserve army, a capitalist economy would continually come
up against what Joan Robinson calls "the inflation barrier."
Thus the industrial reserve army is "the pivot upon which
the law of demand and supply of labor works. It confines
the field of action of this law within the limits ab-
solutely convenient to the activity of exploitation and
to the domination of capital."-^

What, then, are the implications of "neutral"
technological progress? It is immediately evident that

1. Giisten, op. cit ., chs. VII -X.

2. Capital , I, 693.

3. Ibid .

156

if the organic composition of capital is constant, the
capital stock cannot grow faster than the lahor force.
There can be no reserve army in this situation ^ since as
long as additional workers are available there will be
no barrier to Increased investment.

The essential point is that "neutral" techno-
logical progress creates a full-employment situation in
which there are irresistable pressures for a rapid in-
crease in wages. Even aside from the ability of orga-
nized workers to enforce wage demands in these circum-
stances, unless wages were rising so fast that profits
and savings were reduced to a level consistent with the
rate of growth of the labor force, the high rate of
profit would stimulate a ratio of savings (5 investment)
to capital stock greater than this labor force growth
rate.

In this situation, with wages tending to rise and
profits to fall, it is obvious that every entreprenexor
will seek to substitute capital for the "scarce" factor,
labor. This "substitution," of course, is realized
through investment - the "innovations" chosen for reali-
zation will be those most labor-saving. In this way
technological progress ceases to be "neutral" and becomes

1, Of. Hicks, OP. clt .. p. 125. While "autonomous" in-
ventions, according to Hicks, are random and therefore
on balance neutral , "induced" inventions tend to be
labor-saving .

157

labor-saving, causing the organic composition of capital

to increase.

It is therefore surprising that, after develop-
ing this argument vith enormous thoroughness, Giisten
concludes that it gives no support to Marx's theory of
a riding organic composition of capital hecause it
"assumes an alteration in the relative factor-prices and
thereby is excluded as an explanatory factor in relation
to the law of the profit rate."

It is precisely because the alteration of "rela-
tive factor -prices" is the necessary consequence of
neutral technological progress that it provides support
for Marx's theory: this is what demonstrates that the
capitalist economy has an inevitable bias, that economic
growth tends to be shunted off the neutral and on to the
capital-using growth path.

The second line of argument whereby a rising or-
ganic composition of capital can be derived on a Marxist
basis is a logical one, starting from the assumption,
which Gtlsten claims leads to "collapse" of the rising
organic composition thesis, that "the increase of produc-
tivity is everywhere equivalent,"

The point, as stated earlier, is to show that
the technical composition of capital must tend to in-

1. Giisten, on. cit ., p. 139.

158

crease faster than the productivity of labor. As we
have seen, both technical composition (means of produc-
tion per man) and lahor -productivity (net real output
per man) are ratios in vhich the numerator is expressed
in real terms (i.e., as a quantity of use -values) and
the denominator in value terms (i.e., as a quantity of
lab or -time) .

The productivity of labor is the net mass of
use -value produced divided by the living productive
social labor required for its output. The technical
composition of capital is the mass of use-values accumu-
lated in the form of means of production, divided by
the amount of living productive social labor required
to set them in motion. This, in effect, is how Marx
uses these categories when he writes that the value-
increase of constant capital " nur entfernt das Wachstum
der wirkllchen Masse der Gebrauchswerte darstellt . "

If these two ratios were independent ♦ there would
be no reason why technical composition had to increase
more rapidly than labor- productivity. But in fact the
two are not independent.

The use-value of a capital - good is composed of
two aspects: it Is required for the production of
things . and at the same time it is required for the pro-

1. Das Kapital . Ill, 239. Cf . ch. I, supra , pp. 21-23.

159

duct ion of relative sur plus -value . Its utility is there-
fore a combination of its capacity-i ncreasing effect and
of Its labor -savins: effect.

We can therefore assume that, as long as any-
extra labor is available, the use-value of a capital-
good will increase proportionally with its capacity,
assuming no Increase in the productivity of labor - two
identical machines will have twice the use-value of one.
Now if use-value were only determined by capacity, the
movement of technical composition and of labor-produc-
tivity would be identical: if capacity were doubled and
labor input increased by 50^, both ratios would be rep-
resented by iOQ. = 1.333. . . • Since, however, a machine
150

of given capacity has more use-value insofar as it permits
a higher productivity of labor, the use- value of the new
machine will be more than 200, and consequently the tech-
nical composition of capital will exce ed l.:^33 . . . ,
the index of labor productivity.

This logical demonstration that technical compo-
sition must increase more than proportionally with labor-
productivity confirms Marx's contention that, in his
model, the increased organic composition of capital "is
but another express ion f or the incre ased productivity of
labor " and that therefore it is "a logical necessity" of
the development of the capitalist mode of production "to
eive expression to the average rate of surplus-value by

160

a falling rate of average profit."

Summary

\lha.t has been accomplished in this chapter has
heen to establish the theoretical validity, given the
postulates and assumpt^ions of his system, of Marx's
derivation of the "Lav of the Palling Tendency of the
Rate of Profit." The rising tendency of the organic
composition of capital has been shown to be bound, as
a " logical necessity ." to the increasing productivity
of labor, and a falling rate of profit has been shown
to follow inescapably from a rising organic composition
of capital.

¥e thus will be working with two concrete and
empirically verifiable predictions generated by the
Marxian model. If the Marxian system is to uphold its
claim to general validity as the basis for any scientific
understanding of society and of history it must be able
to withstand the empirical test of these predictions.

161

CHAPTER VI

CALCULATION OP THE ?AARXIAW RATE OP PROFIT, RATE OP
SURPLUS -VALUE, AND ORGAOTC COMPOSITION OP CAPITAL:
THE UNITED STATES, 1900-1960, (CURRENT DOLLARS)

Basic Procedure

In accordance with the interpretation of the
Marxian definitions presented in the first part of this
study the rate of profit has been calculated as the ratio
between aggregate net surplus -value and the capital stock ;
the rate of surplus -value as the ratio between aggregate
net surplus -value and aggregate variable capital ; and the
organic composition of capital as the ratio between
the capital stock and the sum of surplus -value and var-
iable capital o All these were computed on the basis of
the aggregate non-farm private business economy. Since
in Marxian terms government (both general and non-profit
government enterprises) and private households, inasmuch
as they employ no productive labor-"- and therefore pro-
duce no sTJTpl-us -value, are "non-capitalist" sectors of
the economy, investment in and property income origi-
nating from these sectors were excluded from the com-
putation. In this stage of the computation the basic
variables for each year were calculated as quantities

1, Cf. supra ch. II, p, 59 •

%i^.. 162

of ourrent dollars .

Gapltal Stoolg

The denominator of the rate of profit and
numerator of the organic composition of capital, the
capital stock, was defined by Marx as the value, netoof
depreciation, of the physical capital Involved in the
total production and circulation process. This stock
has been computed as the aggregate of producer durable
equl-pment » structures , inventories a and fuel and mineral
reserves in the capitalist sect ore It was derived as
the cumulated net investment in each category of capital
assete

To express capital and depreciation in current
dollars a price-index based on the consumer purchasing
power of the dollar was used* This was necessary since
the existing price-indexes for capital goods, based
essentially on labor and materials costs, do not fully
account for improvements in the quality of capital goods
produced, and thereby overstate the actual increase in
capital-goodfl prices over a long period. Deflation of

1«, Of. Go Terborgh, Sixty Years of Business Capital
Formatlon « VJashington, 19dO (Mimeographed supplement >
pp. 2-^)!

"the customary deflation of capital expend-
iture figures by the available indexes of
plant construction costs and equipment
prices is unreliable and misleading.

;« • • e

163

capital expenditures by a consxiinption p2?ice~index gives
a value of the capital stock expressing the current price

So far as we can make out, the available
indexes of equipment prices reflect changes
in prices per unit of equipmen'^ , o » this
might be worth having if the so-called
pieces were the same from year to year, but
as everyone knows most items of equipment
are constantly being iniproved in performance
and efficiency* . . . Not even this much can
be said for the indexes of plant construc-
tion costs o Since each structure is unique,
it is impracticable to price units of output
(finished construction). What the indexes
price is units of input (materials and site
labor) e Obviously this approach makes no
allowance for inrprovements in productive
efficiency in the construction operation it-
self. The omission gives the index an added
upward bias over and above the bias it shares
with the index of equipment prices. . . .

o , « Insteadj we measure changes in
real investment from year to year, this being
defined as investment in dollars of constant
purchasing power. This differs from the
usual deflation by the substitution of an
index of the general purchasing pov^er of the
dollar for the indexes of specific capital
goods prices discussed above, . . , We use
throughout as our deflator the broadest avail-
able measure of changes in the purchasing
power of the dollar, the "iioplicit" deflator
for the privately produced gross national pro-
duct, computed by the Department of Commerce."

This conclusion, however, is Illogical,
The "implicit" deflator for private GNP is
actually a weighted average which includes
the capital goods deflators that have been
judged "unreliable and misleading," The only
consistent procedure is to reject these in-
dexes altogether, and rely only on the
Personal Consumption Expenditures deflator as
a measure of "the general purchasing power of
the dollar,"

164

equivalent of the purohaslng-power originally "frozen"
in the shape of capital goods (or, in neo'^olassical
terms, the original "saorifioed consumptions'') Instead
of a direct estimate of current reproduction costo
"viewed from another angle, the value derived in this
way can he considered the hest approximation to repro-
duotton cost, given the assumption of equal rates of
productivity change in hoth capital-goods and consumer-
goods departments o

In the computation of capital coneun^tion, the
"double-rate declining balance" method was used, as the
most realistic of the various conventional methods of
depreciation accounting*,

Surplus-value

Marx defined surplus-value as the share of the
national income (net of capital consul^ ti on) available
for consumption and investment by the capitalist class,
£i«e., after-tax net property income (profit. Interest,
and rent) originating in the capitalist sector»io In the
present computation the capitalist sector was subdivided
into oori3orate and non-corporate sectorSo For each,
surplus-lvalue was computed gross of nominal depreciation
and other capital charges. Net profit was determined by

1. Cfe G-. Terborgh, Realistic Depreciation Policy ^
Machinery and Allied Products Institute, Washington, 195^j
pp. 1^9-153 •

165

subtracting estiniated actual ooneumptlon of capital
from the oorablned gross surplus-value of the two sub**
sectorsj after this oomhined gross-surplus-value was
adjusted for the nori'-produotive governmental espenditure
paid for through direct taxes on nominal property income*

The non-corporate stream of gross surplus-value
was derived in the following way;

'She total income of uninooirporated husinesseSj
composed of income of unincorporated snterpriseSj inven**
tory valuation adjustments and charged depreciation, was
reduced Twr the incomes of farmers, financial interme-
diaries, and professional practitioners » To the quantity
thus determined were added estimated net interest and
net rent originating in the same sectors » Finally,
from this aggregate v/ere deducted the revenues ascrihahle
to labor seirices of proprietors engaged full-time in
their own businesses, as estimated on the basis of the
average annual earnings of full-time employees in each
industry* The quantity thus derived represents surplus**
value gross of depreciation and of direct personal taxes
originating in the non-corporate sector.

The exclusion of the Finance, Insurance * and
Real Estate industry group was necessary to avoid double
counting, since to the extent that net profit in this
sector originates in the area "of the economy included in
this study it is already accounted for as net rent and

166

1
net interest flowing from the other sectors. Pro-
fessional practitioners were excluded under the assumption
that the totality of their net income represents pay-
ment for their o^m labor services*

In the determination of corporate gross surplus-
value a similar procedure was followed, again excluding
Agriculture and Finance, Insurance, and Real Estate o One
additional component xms included: salaries of corporate

officers, who are considered hy Marx as capitalistSa

recipients of surplus-value » Rent from both corporate

and non-oo27porate sectors vta-B taken net of estimated
real-estate taxes©

Aggregate gross surplus-value was arrived at
by deducting from these Income streams the estimated
portion of them paid as direct taxes imposed upon individ-
ual recipients of surplus-value o The final step in the
computation of net profit was simply to deduct estimated
actual capital consumption from ag^egate gross surplus-
value o

Variable Capital

Although surplus-value is defined by Marx as net
property income originating in the capitalist sector,
he defines variable capital, not as net labor income

1. Theoretically, a portion of the value of office build-
ings, etc. used by these industries, corresponding to the
excluded income, should be deducted from the total capital
stock. This however, was not attempted since an accurate
estimate was impracticable.

2. Of. supra , ch, II, p» 68.

157

originating in that sector but as that portion of net
labor income received by productive laborers alone «

Productive laborers, as shown earlier j isere
defined as those employees in the capitalist sector
whose work is part of the process of actual production
of oomnjodities; in contradistinction to those workers
whose functions, though socially necessary in present-
day society, are involved in administration and distri-
butions but do not contribute to physical production of
goods and services*

G-ross variable capital, accordingly, was confuted
as the portion of total en^loyee compensation in the
commodity-producing industries of the capitalist sector
( Agricultural Services. Forestry- and Fisheries , Mining ,
Manuf aottir ing « Qonstruotion a Transportation a Oomniuni-
cations . Public Utilities , and Services) received by
the productive laborers enrol oyed In each industry*

Net variable capital was derived by deducting
from gross variable capital the estimated portion of it
paid as direct taxes by individual recipients of labor
income «

The Basic Batios

Once the current-dollar values of the capital

le Cf. supra . ch» II, pp. 57-61,

168

Stock* variable capital, and surplus-value have been
calculated,, the fundamental ratios of the Marxian system
( organic composition of capital a rate of profit s and
rate of aurolus-'value ) are directly given©

This calculation, however, differs from the
strict Marxian concept of these ratios in one fundamental
respects it is carried out in current prices through a
price-index relating the money value of the national
income to the sum of use-values making up t he national
income and noi to the quantity of productive labor'^time
required to produce those use-values <, In other words,
it is based on calculations in terras of purchasing power
over units of final consumption, and not over units of
factor input o

It is clear that the deflator used to determine
the current dollar value of capital stock and deprecia-
tion as measured by a "labor-value" index will increase
more rapidly than the deflator measured by a "use-value"
index? precisely to the extent that the net productivity
of labor increases , since the index of the net produc-
tivity of labor is simply the ratio of the two denomi**
nators: national income in use-values over the labor-
value of the national income.

Therefore, to the extent that the index used to
translate the original cost of fixed capital into the
current-dollar total needed to determine the portion of

169

gross income that actually represents capital consumption
rises less rapidly than would a "lahor-value" Index, to
that extent the current value of the capital stock and
the amount to he deducted from gross surplus-value as
depreciation are less than would he the case if a
"lahor-value" index was used» Ratios computed on the
basis of these totals must give a biased image of their
"true" Marxian correlatives. Thus, as against their
values under the strict tlarxian definitions, the rate of-
profit and rate of surplus-value will show an upward,
and the organic composition of capital a downward, bias,
all increasing with time (insofar as net productivity
tends to Increase with time)o

Calculation in these terms, nevertheless, is
entirely relevant to the Marxian model. It is, in fact,
necessary, in order to estimate the strength of the most
important "counteracting cause" resisting the workings
of the "Law of the falling tendency of the rate of profit"?
the effect of increasing labor net productivity in in-
creasing the purchasing power of gross surplus-value.

I/esplte the desirability, from a social-account-
ing viewpoint, of taking induced obsolescence into
account as a real cost of investment through a labors
value concept of capital consumption, it may realistically
be hypothesized that the investment behavior of entre-
preneurs will reflect their expectation of return on

^>v

170

investment in units of final purchasing power rather
than of labor-time* Thus, even if a falling tendency
of the rate of profit were found to exist in lahor-
value terms, this tendency eould scarcely have the
drastic consequences Marx ascribed to it unless it
also became manifest in terms of the values that are
immediately related to capitalistic motivations, ioOo,
in terms of a purohasing-power concept of investment

and profitability..

Accordingly, the preliminary hypothesis to be

tested is this:

As computed in terms of a pricc'^index based on
consumption purchasing power* the Marxian rate of profit
in the U. 3, non-farm economy will show a significant
tendency to decrease over the period 1900-1960 «,

Invalidation of this hypothesis would not in
itself refute Marx's theory, but it would cast substan-
tial doubt upon his conclusions from the theory*

Results

The fundamental ratios and the current-dollar
quantities of surplus-value, variable capital, and the

^/ > 171

capital stocfc for each year from 1900 to i960, as
calculated according to the procedure just desorlued^
are given in Table I and presented graphically (to semi-
log scale) in Charts I and II o Summary data on which
Tahle I is based are presented in Appendix Bo

The trend of the rate of profit over the entire
period was computed on the basis of a regression with
the rate of profit as the dependent, and time as the
independent, variable o All years in the period were
used, except for the years of deep depression (1931*"
1935) and of the second World War (19^1-19^5) «

On a linear basis, this regression is

p» = 13,0570- •1083t (t counted from 1900)
with correlation coefioient r = -•8053

On a logarithmic basis the regression is

log p« = 2,57669 - .0l085t
with correlation coefficient r = -.8021

172

Chart VI-1.

Rate of Profit and Organic Composition
of Capital (inverted). 1900-1960
(Ctirrent Dollar Basis)

Scml-Loavlthmlc oW HOS tfH

2 Crdca X 10 to the Inch

173

Chart VI-2. Rat© of Profit and Rate of Surplus-
Value, 1900-1960 (Current Dollar Basis)

2 Crdcs I 10 to the Inch

'■•^: •:*

174

Tatle VI-1,

Fundamental Rati (as, I90O-1960 (Millions of
Current Dollars)

TeT

(

"TfT

'3T2I

3o00
2o86
3ol2
2o83

3»03
3o28

3»07
2.83
3o02

3.23
2.9^
3.29
3»17
2o90
3.28

3.73
3o76
3.29
3.91
3*93
3.25
3^52
3.4^
3o23
3060
3.30
3»22

7.08
7.06
i|..68

3.^3
3.12
3o76
3.50
3.13
2.71
2*36
2ol0
2,03

2.27

Year

— (ir~

Variable
Capital

(b)
Surplus-
Value

(c)

Capital
Stook

TIT

s«

ilL

1900

4328

3055

4750

2993

5130

3444

5569

4176

5^58

3453

6116

3949

6
7

6879

3889
4329

5866

4328

6892

4214

1910

7521

5512

7^5

4986

8I31

4485

8690

5564

8009

5202

8i^l3

5688

10572

6792

126iK)

6754

15986

5013

18288

6451

1920

22679

10420

16332

8873

16830

6639

21153
20121

8757
8536

20731

9907

2215^^

11684

22013

8547

22178

11401

23151

12366

1930

19467

10008

15177

5411

10978

826

IO8I6

230

13593

3772

15053

5381

17697

7102

20975

8II5

16802

7100

I8I79

7200

19%

20546

8897

27760

10719

37836

12646

46413

14057

ifif

48085

16I89

44428

14899

23677
24514
25708

27913
27808

28440
30797
33945
33392
34063
36820
37704
40785
41851
43450
44729
50296
63661
78306
93058

98533
92176

97239
100894
105434
109220
110092
110967
114219
111484
98092
83598

77937

8I313

82557

85023

90898

89939

88707

92293

104171

119108

126698

130529

134577

70o59
63.01

67*13
74a99
63o26

64o57
59ol4

62o93
73.78
6I0I4
73.29
66.61
55.16
64.03
64.95
67.61
64.25

53.^3
3I036
5el7
5o95
54.33
39.45
41.40
42.42
47.79
52.74
38.83
51.41

53.^1
51.41

35o65

7.52

2.13

27.75
35.75
40.13
38.69
42,26
9.61
3.30
38061
33 ^42
30.29
33.67
33o54

12.90
12o2l
13.40
14.96
12.42
13.89
12.63

12.75
12.96

12.37
14.97
13.22

11*00
13.29
11.97
12.72

13.50

10.61

6.40

6.91

9.58

9.01

7.20

9.01

8.46

9.40

10.70

7.76

10.27

10.83

8.98

5.52

.99

.30

4.64

6.52

8.35

8.93

7.89

8.12

9.64

10.29

10.62

11.09
12.40

11.07

175

Year

19^
^7

^8
^9
1950
51
52

53
5^
55
56
57
58

i960

(a)
Variable
Capital

(b)

Surplus-
Value

Capital
Stock

46060

12319

153762

S^kzz

13255

I86I5I

59090

21692

212080

55232

18^35

2204'38

6202if

18689

235590

71787

21519

267667

75^73

21399

287680

8I278

20892

302882

77163

21200

3l6o48

83938

28^7^

331251

89116

272^1-5

35854^

913^5

27^12

389315

86538

21276

9^350
97^9

30079

1^23721

30597

2fi^56l6

JUL

26*75
2ii'«81

36071

33o38

3O0I3
29o98

28e35

25 a 70

2?»i!'7

33o92

30»57
30.01
29.21
31.88
31.39

TiT
ill

8,01

7.12

10.23

8.36

7.93

S^Oil-

7«4^
6o90
6.71
8«6o
7.60
7.0i^
60I9
7.10
6.87

2.63

2o79
2*63

2o99
2o92
2o87
2.97
2,96
3«21

2.95
3.08
3o28

3«65
3.i^l
3o48

Souroes!

Column a (Variable Capital): Appendix B, Table VII,

Column b (Surplus-value): Appendix B, Table VI.

Column c (Capital Stock); Appendix B, Table II.

Column d Cs* (rate of surplus-value)] Column b
divided by Column a.

Column e Cp' (rate of profit)]: Column b
divided by Column 0.

Column f [Q (organic oon^osition of capital)]:
Column divided by Column a plus Ooliuan b.

176

Sour CSS and Methods

The statistical sources used were:

U.S. Department of Conimerce; National Income^
1929-1953, U.S. Income and Output , Survey of Cui-rent
Business, July 1962 (which continues all scries taken from
U.S. Income and Outout through I960 - all references here-
after to U.S. Income and Output should be considered to
include reference to the July 1962 Snrvey of Current
Bu siness for the years 1956-1960), Historical Statistics
of the U.S., Colonial Tines to 1957 j and Statistical
Abstract of the U.S., 1962 o

U.S. Bureau of Labor Statistics; Employment and
Earnings (BLS Bulletin 1312)

U.S. Departments of Labor and Coinmerce; Construction
Volume and Costs, 1915-1956 and subsequent issues of
Construction Review

U.S. Internal Revenue Service; Statistics of

Income ( annual )

U.S. Bureau of the Census; Census of Manufactures
195I|- and 1958 , and Census of Mineral Industries, 1958

R» Goldsmith; A Study of Saving in the U.S.

Jo Kerdrick; Productivity Trends in the U.S.

Go Terborgh; Sixty Years of Business Capital

Formation

S, Kuznsts; National Income and Its Composition

Ro Martin; National Income in the U.S., 1799-1938

177

Ao Capital Stock

1. Price Indes (Appendix B, Table I)o The price
index used to express capital stock and depreciation in
current dollars was, for I929-I960, the G-ross National
Product Personal Consumption Expenditures Deflator ( U. So
Income and Output . Table VII-2, p* 220) linked in 1929 to
the Bureau of Labor Statistics Consumer Price Index
( Historical Statistics , Table EII3, p« I76) and in I913 to
the Snyder Cost of Living Index as given by Goldsmith
( Study of Saving . Vol. I, Table T-I6, p. 377) o

2o Producer Durable Equipment (Appendix B,
Table II, col, a) « For the period 1929-I960 non-farm
private purchases of Producer Durable Equipment were
estimated as the residual after deduction of farm PDE pur-
chases as estimated by the Securities and Exchange
Commission ( U. S. Income and Output » Tables V-3 and V-9,
pp. 190, 19^ J and National Income, 1929-1953 . Tables 6 and
31, pp. 166, 208, extended to 1929 by Table 32, p. 210)
from total private purchases of Producer Durable Equipment
( U. 3. Income and Output . Table I-l, p. 118). For the
period 1899"*1928 the figures used are those given by
Goldsmith ( Study of Saving, Vol. I, Table P-5, p. 877). As
Goldsmith's estimate of business investment In passenger
automobiles is considerably below that of the Office of
Business Economics, his estimate of this component for
1900-1928 was increased by the percentage necessary to

178

equalize aggregate PDE expenditures according to the two
concepts in 1929, The initial estiraate of the stock of
Producer Equipment at the end of 1928 was taken from
Goldsmith ( Study of Sa ving, Vol. Ill, Table ¥-1, p. lit-)
reduced by the percentage of agricultural equipment in
this stock, as given in Historical Statistics , p, 1^2.

Gross investment in producer Equipment was broken
down into groups of different average life-expectancy on
the basis of the percentage breakdown implicit in
Goldsmith's figures for 1900-19^5, projected to 19514- on
the basis of U.S. Income and Output , Table V-5, p. 192o
Since the QBE has not continued this series beyond 195'4-»
the percentage breakdown used for 1955-1960 was that of
total expenditures for the period 19l!.7-195l4-o

3, Business Structures (Appendix Bg Table II,
col. b)o Investment in business plant was taken as the
sum of the following seven series of private structures
put in place: Industrial , Office & Warehouse , Store, Res-
taurant & Garage , Miscellaneous Non-residential , Public
Utility , Hon-house keeping. Residen tial, and All Other Private

structures

These series, for the period 1915-1960, were
taken from Consti^uction Volxme and Costs, 1915-1956
( Supplement to Construction Review , 1957) and subsequent
volumes of Constructi o n Review » They were extended back
to 1900 by the estimates given by the Machinery and

179

Allied Products Institute in the statistical notes
supplementary to Sixty Years of Business Capital Formation ,

The stock of business structures at the end of
1899 was taken from Goldsmith ( Study of Saving , Vol. Ill,
Table ¥-1, p. lli). Business plant was depreciated, as
by Goldsmith, on the basis of a 50 year life-span,

i|.. Fuel and Mineral Development Expenditures
(Appendix B, Table II, col, c) . Expenditures for mining
development for the period 190O-I96O were estimated as
by Goldsmith as yfo of the value of coal and minerals
extracted, and x^rere taken from Study of Saving , Vol. I,
Table R-l5> Po 6OI; Historical Statistics , pp. 350-351;
and Statistical Abstract of the U.S., 1962 , pp. 712-713 o
They were depreciated, as by Goldsmith, on the basis of
a I4.O year life-span.

Oil and Gas Vfell Drilling expenditures for 1900-
19I4.5 were taken from Goldsmith ( Study of Saving , Vol. I,
Table R-lIj-, p. 6OO) and, for 19^6-1960, from U.S. Income
and Output , Table V-3, p. 190, They were depreciated,
as by Goldsmith, o'n the basis of a 25 year life-span.

The initial value of each series was derived from
1899 expenditures on the basis of the average ratio of
capital stock to gross investment for Producer Equipment

in 1899.

5, Inventories (Appendix B, Table II, col, d) „
The aggregate value of non-farm business inventories at

180

the end of 19^0 "was taken from National Income, 1929-1953 y
p. 1360 This total was cumulated forward and backward by
the sum Net Inventor;/ Change less Inventory Valuation
Adjustment as given for 1929-1960 in U.S. Income and
Output , Table I-l, p. II8 and Table 1-6, p, 126, and,
for 1900-1926, by Goldsmith ( Study of Saving , Vol, I,
Table P-19, p. 903).

Bo Capital Consumption (Appendix B, Table III)

Capital Consumption for every category of depreciable
asset was calculated on the basis of the life-spans used
by Goldsmith ( Study of Saving , Vol. I, Table P-7, p. 878)
which he, in turn, took from the Internal Revenue Service
Bulletin F, 19ij-2 o Depreciation on each component of the
capital stock in a given year was calculated by dividing
the value in current prices of that component at the
star'^. of the year, plus l/2 the gross investment for that
year, by l/2 the average life-span.

The method of computation of capital consumption and
of the mid-year value of each component of the capital
stock is shown in Exhibit A , which gives the computation
of the stock and depreciation of aggregate biisiness
structures for 191+8 and 19lj-9o

Co Total Gross Surplus-Value

la Corporate Gross Surplus-Value (Appendix B,
Table IV) o Gross surplus-value originating in the

181

corporate sector was estimated as the sum of Corporate
Book Profits , Inventory Valuation Ad.fastment . Officers'
Salaries , Net Interest . Met Rent , and Capital Charges
(including depreciation charges and capital investment
charged to current expense)©,

(a) Corporate Book Profits ; For 1929-1960 total
after-tax corporate profit (including depletion charges)
Xv'as taken from U.S. Income and Output . Table 1-12, p. 13!^,
reduced by after-tax profit in the Agriculture and Finance ,
Insurance, & Real Estate sectors as given in U.S. Income
and Output , Table VI -7, pc 20^, and Rational Income, 1929-
12i3, Table 20, This series was extended back to 1921
^y Statistics of Income totals and to 1900 on the basis
of the estimates of corporate net profits given by-
Goldsmith ( Study of Saving . Vol. I, Table C-5, p. 917).

(b) Corporate Officers' Salaries ; for 1929-1960
corporate officers' salaries were taken from U.S. Income
and Output , Table 1-12, p. 13!^, less officers' salaries
in the Agriculture and Finance, Insurance^ & Real Estate ,
sectors as given in Statistics of Income . For 1919-1928
all these totals were taken from Statistics of Income .
The series was extended back to 1900 on the basis of net
corporate dividend payments for the previous year as
estimated by Martin, National Income in the U.S., 1799-
1938 , Table I3, p. l).2o

182

(c) Met Interest ; For 1926-1960 corporate net
interest was taken from Statistics of Income total net
interest payments by non-financial, non-agricultiiral
corporations. This series was extended to 1919 on the
basis of Statistics of Income figures for total interest
paid by these corporations, and to 1900 on the basis

of interest paid by manufacturing corporations, as given
by Goldsmith ( Study of Saving , Vol. I, Table C-13, p. 925) o

(d) Net Rent ; For 1933-1960 corporate net rent
was taken from Statistics of Income total net rent and
royalty payments by non-financial, non-agricultural
corporations, extended to 1929 on the basis of Statistics
of Income figures for total rent and royalty receipts by
the Finance, Ins'orance, & Real Estate sector. The whole
series was reduced by the ratio of non-income taxes paid
to rent received for Real Estate corporations, as given
annually in Statistics of Income e This final series was
extended to 1900 on the basis of net rental payments
from rrianufacturing industries, as estimated on the basis
of census figures by Martin,

(e) Capital Charges ; Depreciation charges by
non-financial, no n- agricultural corporations for 19i|.6-1960
Xr/ere taken from U.S. Income and Output , Table VI-18, p, 216,
For 1900-19i|-5 total corporate depreciation charges as
given by Goldsmith ( Study of Saving , Vol. I, Table C-tj.1,

p« 955) were reduced by the percentage of tax depreciation

183

taken by the agriculture and financial sectors, as given
annually for 1919-1945 in Statistics of Income , and
estimated for years between 1900 and 1918 as the 1919-
1921 average of this ratio.

Capital outlays charged to current expense were
taken as the total oil and gas -well-drilling and mining
development expenditures shown in Table B II, col. c,

(f) Inventory Valuation Adjustment ; Corporate
non-farm inventory valuation adjustment vas taken from
U.S. Income and Output , Table 1-8, p. 126, and Study of
Saving . Vol. I, Table P-19, p. 903.

2. Unincorporated Business Gross Surplus -Value
(Appendix B, Table V) . Gross surplus-value originating
in the unincorporated-business sector (i.e., all unincor-
porated business vith the exception of the Farm . Finance ,
Insurance, & Real Estate , and Professional sectors) was
estimated as the sum of Proprietors Income . Inventory
Va lua t ion Ad.ius tment . Net Interest . Net Rent , and
Depreciation Charges , less the Wage -equivalent for the
work of proprietors working full-time in their own
business.

(a) Proprietors Income : Income of unincorporated
enterprises for 1946-1960 was taken from U.S. Income and
Output . Table VI-4, p. 202, and, for 1929-1945, from
National Income. 1929-195^ . Table 1?, p. 182. This sum
was reduced by Finance, Insurance, & Real Estate income,
and by the income of Farm and Professional proprietors.

184

estimated as a percentage of their respective sector totals
by interpolation between and extrapolation forward from
the benchmark estimates for 1929, 1939, and 191^-5 given in
National Income, 1929-19^3 , p. 77 on the basis of the
percentage division of National Income within each sector
as shovn in U. S, Income and Output , Table I-IO, p. 130<,
The series was extended back to 1900 on the basis of the
estimate of entrepreneurial income in these sectors given
by Martin, National Income in the U. So. 1799-1938, Table

10, p. 39o

(b) Depreciation Charges ; Non-corporate depre-
ciation charges for 19i|.6-1960 were taken from U. S, Income
and Output , Table VI-19, p. 217o This series was projected
back to 1900 on the basis of estimates of depreciation
charges on unincorporated business commercial and industrial
structures and producer durable equipment given by Gold-
smith ( Study of Saving , Volo I, Tables R-10, R-13* P-12,

and P-13, PPo 595, 599, 891, 693.)

(c) Net Interest ; Net interest from unincorporated
business was estimated on the basis of "Net Interest from
Sole proprietorships and Partnerships" as shown in U. S,
Income and Output , Table 1-12, p, 131^-, extended to 1900

on the basis of the estimate of net interest received by
individuals given in Martin, opo oit o. Table i|., po 21o To
derive the net interest component for each year these
estimates were multiplied by the ratio of Proprietors Income

185

in the sectors covered to total Proprietors Income.

(d) Met Rent ; Net rental payments from the
covered sectors of unincorporated business for 1959 were
taken from Statlstios of Income for that year, the first
in which these figures have been glveno On the assumption
that rental payments from wholesale and retail trade in
1929, as derived in Martin, op> cit o. Table 33, p« 79,
from the 1930 Census of Business , were evenly divided
between corporate and non-corporate sectors, net non»
corporate payments in that year v/ere estimated by apply-
ing the 1959 ratio between total net rent from the
sectors covered and total rental payments from the unin-
corporated wholesale and retail trade sect ore This
estimate xms projected back to I900 on the basis of
Martin's estimate of total rent from wholesale and re«
tail trade, and forward to 1959 on the basis of net cor-
porate rent from wholesale and retail trade, as shown
in Statlstios of Income . The I960 figure was estimated
by projecting the average annual increase for the pre-
vious two years 6 The tax ratios previously derived for
corporate net rent were applied to the entire series.

(e) Inventory Valuation Adjustment ; Inventory
Valuation adjustment for I929-1960 was taken from U« S«
Income and Output s Table 1-8, po 126, and, for I9OO-
1928, was taken from Goldsmith ( Study of Saving < Vol. I,
Table P-19, p» 903.)

186

(f) Wage-Qgulvalent s The number of proprietors
engaged In full-time work in each industrial sector for
1929-1960 v/as derived by subtracting "?\ill Time Equivalent
Employees" aa given in U. Sa Inco me and Output t» Table
VI-13, p, 211 and National Income. 1929-1953 . Table 25,
p» 196, from "Persons Engaged in Production" ["This
aeries measures man-years of full-time employment by
persons working for wages or salaries (as shown in Table
71-13) ^J^d by active proprietors of unincorporated
enterprises"] given in U» S<. Income and Output s Table
VI-16, p, 21^ and National Income, 1929-1953 . Table 27,
p* 202. This series was projected back to 1900 on the
basis of aggregate private non-agricultural employment
(taken from Historical Statistics , ppo 73 and 75). The
aggregate wage-equivalent was determined, for I929-I960,
by multiplying the number of proprietors engaged in full-
time work in each sector covered by the average annual
wage in that sector, as given in II« 3. Income and OutT?u tj
Table VI-I5, p. 2I3, and National Income. 1929-1953 .
Table 27, p« 200, and, for 1900-1928, by multiplying
the estimated total number of full-time working proprie*-
tors by the average private non-agricultural wage, as
projected back from I929 on the basis of the wage indexas
compiled (for 1919-1923) by Kuznets and (for I90O-I9I8)
by Douglas, as given in Historical Statistics of the

1. U, S« Income and Output , p. 21^«

187

3o Direct Taxes on G-roas Surplus-value (Appendix
B, Table VI) « For I917-I960 direct taxes paid out of
gross surplus-value were calculated on the Tmsle of the
estimated effective tax rate paid by upper-bracfeet in-
come recipients* This rate was estimated^, on the basis
of the figures given in Statistics of Income , by
dividing total tax paid by total income for those re-
tixrns extending to but net including the bracket contain-
ing the return V7ith rank, cumulated from the top, equal
to 5% of total "Persons Engaged in Production - Private
Industries" as given for 19'lj'6-196o in U» So Income and
Output . Table VI-I5, p, 21^, for 1929-19^5 in National
I ncome. 1929-19 '53 . Table 28, p. 202, and, for I917-
1928, in Eendrlck, Productivity Trends in the U. S. . p, 306,

The effective final rate of taxes on gross
surplus-value xiras determined by multiplying this Federal
Income Tax rate by the ratio between total ( Statistics
of Income ) income tax payments and all other Federal,
State, and Local personal tax payments, as given for
1929-1960 in U^ S. Income and Output o Tables III-l and
2, pp. 16^5, and National Income, 1929-1953. Tables
8 and 9, extended to 1917 on the basis of Kendrick,
op. clt ». Table A-II-b, pp. 296-7 •

The portion of gross surplus-value subject to
tax was determined by deducting from total gross surplus-

\\r~

188

value the sum of capital charges (estimated as above),
inventory valuation adjustment (estimated as above), and
undistributed corporate profits, as given for 19i*'6-196o
in U. So Income and Output . Table VI-9, p. 20? > and, for
1929-19^5 in National Income, 1929~1953 » Table 22, ex-
tended to 1919 by the estimate of corporate net saving
in Kuznets, National Income and Its Oomposition , Table
22, and to I917 by the estimate of corporate net profit
lees dividend payments in Martin, National Income in
the U. So . p. ^'2o

The series of total direct taxes paid on gross
surplus-value was extended back to 1900 by the estimate
of total personal tax payments in Kendrick, op. oit ».
Table A-II-bo

Do Variable Capital (Appendix B, Table VII)

lo Total employee compensation for each industry
group ( Manufacturing . Mining « Construction . Transpor-
tation, Eublio Utilities and Communications , Seryloes,
Agricultural Seiryises, Forestry, and Fisheries ) was taken
from U, 3. Income and Output . Table VI-I, po 200, and
National Income. 1929-1953 . Table 1^, for I929-I960,
extended back to I919 by the estimates given in Kuznets,

1, After exclusion of en^jloyee compensation for employees
of households, professionals, and non-profit enterprises.

)^ ' 189

opo Glt o, TatJle 50 9 and to 1900 by the estinstes given
in Martin, ox>e cit *

2, Gross labor income originating from each
Industry was estioiated by deducting from total employee
compensation the corresponding total of corporate officers
salaries as given for 1919-1960 in Statistios of Income
and extended back to 1900 by the previously derived series
of aggregate officers* salaries (with the exceptions
of the Servioes and Transportation^ Oommuni oat ions, and
Public Utilities groups, for which Statistics of Income
cautions that its pre«1929 figures are seriously incom-
plete and for whlehj therefore, it was the 1929 estimate
of gross labor income itself that was extended back by
the Kuz-nets and Martin series »)

3« Gross productive^labor income was obtained
by multiplying gross labor income by the estimated per-
centage of it received by productive laborers. In the
specific industries this percentage was derived as
follows s

(a) Manufacturing ; The Census of Ifenufaotures
definition of "production-related worker" is virtually
identical to the Marxian definition of "productive
laborer o" Accordingly, the percentage of labor income
received by productive laborers is indicated by the per-

le Cfo supra t cholls pp» 60-51 •

190

oentage of total payroll (excluding corporate officers'
salaries) shown in the Census as received by production
workers© This percentage is given in the 1958 Oensus
of Manufactures , Vol. I, pp. 1-3, for the years 1899,
190^, 1909, 191^, 1919, 1921, I923, I925, I927, I929,
19 33 J 1935, 1937 » 1939, 19^7 s and annually from 19^9 to
19580 For other years between 1919 and i960 the per-
centage of income received by productive laborers was
estimated by interpolation on the basis of the ratio, of
^production workers" to "all employees," as given in
the BLS Bulletin 1312 » Employment and Earnings , For the
period 1900-1919 it was estimated by linear interpolation
between the benchmark figures given by the Census ♦

(b) Transportation; Communications and Public
Utilities; Services; and Agricultural Services , Forestry «
and Fisheries S In the absence of either census or survey
data on the percentage of production workers in these
industry-groups, the percentage of production-worker
income determined for manufacturing was used to estimate
gross productive-labor income originating in them,

(c) Mining s The 1958 Census of Mineral Industries ,
Vol. I, pp. 1-^, gives data on the percentage of pro-
duction workers and production-worker wages for the years
1902, 1909, 1919, 1929, 1939, 195^* and 1958. Using the
percentage of labor income received by production workers

^;.\

191

in those years as benchraarks, this percentage for other
years was determined, for 19^7-3-960, by Interpolation
on the basis of the ratio of production workers to all
employees given in Employment and Earnings and. for
1900-19^5 by interpolation on the basis of the per-
centages previously determined for manufacturing*

(d) Gonstruction g Employment and Earnings
shows, for 19^7-1960, the number of "construction work-
ers" and of "all employees" in the constraction industries©
For these years the percentage of labor-income received
by productive laborers v/as derived by multiplying the
percentage determined for manufacturing by the ratio
between the number of productive laborers (as a pro-
portion of all employees) in Construction and in
Ifenufaoturing, ae given by Employment and Earnings o The
series was extended back to 1900 on the basis of the per-
centages previously determined for manufacturingo

^o Direct taxes on variable capital^ for 1929«
i960, were estimated on the basis of the average tax
rate applying to all but the upper brackets «> This rate
was determined by deducting uppei?-bracket total income
and federal income tax paid, (as already calculated to
determine the tax rate on gross surplus-value) from,
respectively, total personal income (as given in U. .3<»
Income and Output t Table II-l, p» 1^) and total Statistics

192

pt Income personal incom© tax payments, then dividing
this residual tax by the residual income*

As in the case of direct taxes on gross surplus-
value, the effective final rate of direct taxes on var*-
iable capital was determined by multiplying this federal
income tax rate by the ratio of total personal tax pay«
ments to federal income tax payments »

The 1929 rate of taxation of variable capital
was extended back to 1900 by the series of total per«
sonal tax payments as a percentage of G-NP taken from
Kendriok, pp» cit «» Table Afll-'b*

Evaluation of Data

The reliability of data in all the statisticsal
series diminishes as they go back tov/ard 1900, and is
clearly much Icwer for the early years* For the period
since 1929 all series except net rent from unincorporated
business are taken directly from estimates by the Office
of Business Economics and the Internal Revenue Service
which are judged by these sources to be the most reliable
available, and from Census and Bureau of Labor Statistics
data.

For the pre~1929 period the quality of estimates
ranges from fairly reliable, in the case of wage data
and of most statistics from the corporate sector (with the
exception of net rent,) to highly unreliable, in the case

193

of noi>*oorporat« gross surpluS'-Talue* Oonsequently* the
pFe»1920 estloates should be taken essentially as in-
dloating the general order of magnitude of the rate of
profit9 rate of surplus-value* and organic oonposition
of oapital in that period.

As an approximation of this sort, ths pre-1920
data are fairly satisfactory. This measure of oonf idenee
is based on the faots that even txie least reliable
estimates have no evident bias in either direotlwn*
that the genez«l level of all ratios is quite stable
throughout the entire pre-war period, and that the fluo-
tuations in the x«te of profit conform to the kncwn
oyolioal pattern^ Ths seeming anomaly of the steep
decline of the rate of profit in the years 1918-1919 i>
to be explained hy the rapid incirease in money wages
(almost 50ji over the two years), the institution of
significant income taxation for the first time, and the
substantial negative inventory valuation adjustment due
to sharp price increases*

The general trend of the rate of profit emerging
from these data tends strongly to confirm the hypothesis
tested. The computed regressions show a clear and
statistically significant tendency of the Marxian rate
of px>ofit to decline over time* This tendency is shown
most strikingly by simple coBQ>arison of the 1929 rate of

194

profit J iloOO;^j to the 6«87/^ achieved In the most
recent peak year, 196O0

The trend of the organic composition of capital
is not as strongly marked, but is also upward over the
entire period, even after the spectacular fall in World
War II o In i960 its value was 3oi|^, against 3»20 in
1929 and 2o86 in the earliest peak year, 19036

The rate of surplus-value, concerning which Marx
provided no systematic basis for prediction, shows a
major decline over the 60 years, contrary to Marx's
expeotationo

Exhibit A g Aggregate Business Structures, 194^8-19^9 *
(Colo b in ^, all others in $ millions)

rear (a) (b) (0) . jd) , ( e) (f) . . (g)

19^ 69492.8 105*79 735l6oi^ 6030 306le3 76W5.I 75000 08
19if9 762f85«l 99^1 7580^ai^ 5721 31^06 7837808 77091o6

Explanation

Cole as Value of aggregate structures at end of previous
'~ year (col* f for previous year.)

Col« bj Price-index for current year divided by price-
*" index for previous year*,

Ool© s? Initial value of structures for current year
" (col* a multiplied by col* b) •

Col* ^^: G-ross Investment in business structures during
current year*

4\ I 196

Colo e; Value of capital consumption for current year
"" (col, c plus 1/2 colo d divided by 25s ^^^^
the as'sumed 50-year average life span for
business structures.)

OoId fs Terminal value of structures for current year
"" (colo c plus oolo d minus colo ^)o

Colo ^2 Average (raid-year) value of structures for current
year (colo c plus colo f divided by 2)o

196

CHA.PTER VII

G/^LCUIATION OF T'^E MARXIAN RATE OP PROFIT, RATE
OP SURPLUS-VALUE, ORGAl^IIC COMPOSITION OF CAPITAL,
mD NET PRODUCTIVITY OF LABOR: THE UNITED STATES,
1900-1960 (LABOR-VALUE UNITS)

Basic Procedure

Computation of the rate of profit, rate of surplus-
value, and organic, composition of capital in strict
accordance -with. Marx's concepts requires that the basic
categories of his system (variable capital, surplus-value^
capital consumption, capital stock) be calculated in terms
of the basic quantitative ujn.it of the Marxian system: the
hour of socially necessary labor-time ^

Calculation on this basis requires one new set
of data in addition to those developed in the previous
chapter: the series of total man-hours of productive
labor actually performed each year* Since the same portion
of the economy was covered, and the conceptual approach was
the same, as in the preceding chapter, the relevant annual
current-dollar series could be taken directly from the
data of that chapter. These series are: variable capital,
gross surplus-value, gross investment in fixed capital^
rate of capital consumption, and value of inventories o

197

Each of these must be transformed from a set of
dollar magnitudes into the corresponding quantities of hours
of socially necessary labor-time, in order to determine
net surplu3-val\ie, capital consumption, and the total capital
stocko The key problem, therefore, is to determine the
ratio at which current dollars of a given year represent
hoiirs of labor-time, the labor-content of the current dollar o

Marx defined the labor-content of the price unit
as the ratio between the number of hours of productive
labor performed during the year, and the money-value of
the net product of that year, the latter term being
identically the mo ney net income of productive laborers
and caoitalists,-^

An equivalent definition, which a3.1ows direct
calculation in labor-units and is therefore preferable in
the current context, is the ratio bet^^'een the labor-value
of the gross income, the sum of current productive labor
and capital consumption , and the money-value of the gross
income, the sum of variable capital and gross surplus-value .
It is this latter definition, therefore, that was used in
this chapter to calculate the labor-content of the current

dollar.

Net surolus-value in labor-units is thus determined

1, Cfo supra , cho I, p. 19,

198

by deducting from the number of hours of productive labor
performed during a year the current-dollar total of variable
capital multiplied by the labor-content of the current

dollar.

Of the four variables determining the labor-
content of the current dollar, tvjo ( current-do llar variable
capi tal and current-dollar gross surplus-value ) are
directly known from the calculations of the previous chapter,
and one ( current input of productive labor-time ) is
directly established in this chapter. The fourth, labor-
unit capital consumption , requires indirect computationo

In any given year capital consumption consists Oj.
t-wQ components: depreciation of the capital stock on
hand at the beginning of the year and depreciation of fixed
capital put in place during the year* Assuming that the
initial labor-unit value of the stock of fixed capital Is
knovn, it remains necessary to ascertain depreciation of
the current year's gross investment in fixed capital o

Simultaneous determination of these two variables
is achieved through an iterative solutiona Ko matter to
how many decimal places the quantities are calculated, for
each level of precision there exists one and only one pair
of values for capital consTjmption and labor-content of the
current dollar consistent -with each other. From any starting
point successive approximations mil finally yield these

figures,

199

The remaining problem was determination of the
labor-unit value of the stock of fixed capital at the start
of I9OO0 Beginning x^ith the current-dollar value of fixed
capital at the start of 1900, as established in the pre-
vious chapter, it was possible through a similar iterative
process to derive a figure for the labor-content of the
1900 dollar which, multiplied by the original current-
dollar capital stock, would yield an initial labor-value
of fixed capital consistent with that labor-content of the

1900 dollaro

This figure, however, if unadjusted, would pro-
nouncedly overstate the 1900 rate of profit and understate
the 1900 organic composition of capitalo This is due to
the fact, established in the previous chapter, that
estimation of current-dollar fixed capital through a price-
index with use-value denominator will understate the value
of capital stock and of capital cons-amption relatively to

estimauion tnrougn a price-j-m-iex ivxon xc. k^^x ^^x..^

tor if the productivity of labor is increasing over time.

Since the initial underestimate of the labor-
unit value of fixed capital would disappear progressively
as the original capital stock was depreciated, the trend
of the rate of profit would shoiNt a serious downward bias,
and the trend of the organic cosiposition of capital would
show an equally strong upward bias.

1, Of. Supra , ch. VI, pp. 168-169.

200

Thus in order to remove this distortion and to
make the original estimate of the labor-unit value of the
capital stock methodologically homogeneous vith the sub-
sequent estimates of the value of the capital stock it
was necessary to correct for this understatement through
a substantial increase in the original current-dollar
estimate of the stock of fixed capital at the start of 1900.

Calculation according to .the procedure outlined
abwe yields theoretically correct estimates of the Marxian
categories variable capital , surialus- value , and capital
stock and of the fundamental Marxian ratios. The latter
now include not only the organic compositi on of capital
and the rates of profit and surplus-value , but also the
net productivity of labor , expressed (given the appropriate
price-index) as base-year dollars produced p er man-hour of
productive labor . For every year labor net productivity is
equal to the reciprocal of the product of the labor-content
of the cvirrent dollar and the price index for that year»

1, Or ganic composition of capital as computed is a true
reflection of the Marxian ratio only if unemployment.
Including short-time work, is at its minimum level.
This minimum percentage mej vary over time (particularly
if Marx was correct in his expectation that the "industrial
reserve army" would tend to increase relatively to the
employed labor force). But in every given business cycle
it may be assumed to approximate the actual rate of
unemployment during the prosperity phase.

201

There thus are three hypotheses to be tested:

1. The Marxian rate of profit in the U. S.
non-farm economy vill shoTj- a tendency to decline over
the period 1900- i960.

2. The organic composition of capital vill show
a tendency to Increase over the same period.

3. The net productivity of labor vill tend to
increase more than -proportionally vith the organic
composition of capital (i.e., in the equation '^= a Q^
u will prove to be greater than unity) »

Invalidation of any of these hypotheses on the
basis of data measured in labor-units would constitute
empirical evidence contradicting the "Law of the Falling
Tendency of the Rate of Profit" as formulated by Marx.

Results

The fundamental ratios and the labor-unit quanti-

stocky as calculated for each year from 1900 to I96O
according to the procedure just described, are set forth
in Table VII- 1 and presented graphically (to semi- log
scale) in Charts VII-1, VII-2, VII-3, and VII-4. Summary
data on which Table VII- 1 is based are presented in
Appendix C,

Testing of the hypotheses set forth above yielded
the following results:

202

lo The trend of the rate cf profit over the entire
period was coTnputed on the basis of a regression with the rate
of profit as the deoendentj and tiine as the independent, vari-
able « All years in the period v/ere used, except for the years
of deep depression (1931-1935) ^nd of the Second ¥orld War

(19LLl-19i|5)c

On a linear basis, this regression is

p' = 11 08500 - ol277t (t counted from 1900)
with correlation coefficient r = -0B79O
On a logarithmic basis the regression is

log p' = 2.51108 - 0OI619
with correlation coefficient r ■= -.9065
2« The drastic decline in the organic composition of
canital during the Se-c:rr\d World War and the slow return of
the organic composition to its pre-vjar level made it effec-
tively impcssible to compute the trend of the organic composi-
tion of capital through a regression covering the entire period.
Instead, separate trends were computed for the pre-war and

post-war periodso

(a) For the pre-war period, the years used vjere the
business-cycle peak years 1910, 1920, 1923, 1926, 1929, and
1937 J the prosperous year 1905 (when productivity was at a
relative peak) and the last real peacetime years, 1915 and
19)4.0. The trend of the organic composition of capital was
computed on the basis of a semi-logarithnic regression with
the organic composition of capital as the dependent, and
time as the independent, varlabloc

203

This regression is5

log Q = laiW + c0075i+t (t counted from 1900)
'With correlation coefficient r = o967
(b) For the post-war period all years from 19)i-7
through I960 except for the recession years 1914-9, 1951+, and
1958 vjere usedo As for the pre-war period, the regression
was comp-ated on a semi-logaritbi-aic basis <,
This rftgression is:

log Q = 1,09380 + o02382t (t counted from 19ii-7)
mth correlation coefficient r = .982
3. The relationship between the net productivity of
labor (IT) and the organic composition of capital (Q) was com-
outed through regressions with the logarithm of net productivi-
ty (in I95I1 dollars per man hour) as the dependent, and the
logarithm of the organic composition of capital as the inde-
pendent, variables As in the computation of the trend of the
organic composition of capital separate regressions viere com-
puted for the pre-war and post-war periods, using the same
years as were used for the trend of the organic composition of

capitalo

(a) For the pre-war period this regression was:

log IT = I.805B7 log Q - 2oll056
(T= .12118 q1. 80587)
with correlation coefficient r = »888

(b) For the post-war period this regression is:

iog7r= 1.15331 log Q - .70135

(T= .149583 qI-15331)
with correlation coefficient r = o966

204

Chart VII -la Rate of Profit and Organic Composition
of Capital (inverted), 1900-1960
(Labor-Unit Basis)

stmi-Locmiimic 1W» 'f*f 'to if'S Vt Hit

2 Crclcs X 10 to th« loch

rUO ItV IHII IfV

ItSi

W lUo

205

Chart VII -2. Rate of Profit and Rate of Sxirplus-
Value, 1900-1960 (Labor-Unit Basis)

P'-sJ

Srml-Lofiarilhnilc
;!C:>cI.-si 10 tolhclnch

206

CHART VU - 3

ORQ&IilO C0HIOSITI09 OF CAPITAL - Selected Years , 1900-1960

Chart VII-4* Labor Productivity and Organic

Composition of Capital, Selected
Years, 1900-1960

207

1905-1940
(9 years)

1947^1960
(11 years)

5 6 7 8 9 10

208

Table VII -1,

Fundamental Ratios, 1900-1960 (Millions of
Productive-Labor Manhours)

Year

1900
1

2
3

7
8

9
1910
11
12
13
11+
15
16

17
18

19
1920
21
22
23

2i]-

25
26

1930

31
32

33
3k
35
36
37
38
39
19i|0

^^
)+2

i)4

ii5

(a)

Variable
Capital

11^796. 6

16270.5
171if6,8
1708lc8
17330e9
l8808o5
20295.6

20)|73a

173980O

201^13.9
20053.0

207 81 el

228l8o7

22096.4
20573.0
20386,11-
23805«6
2626l4.,3
30157 cl
27586.1
27000.1

20281.5
23950,6

27502.5

251+66, []

25)|79.5

25808.0
27791.1
25806,3

26232. k
23050 3
21139.5
20k6ii..5
22177.3
20153.2
205^2.3
22936.9
2[}.836e5
19529,1
2l66ko2

22867.3
29211.1.3
35980, ij.
Ii.1360,2
39338.9
35119.2

(b)
Stir plus-
Value

9768. )|

9687.5
1096lo2

12175o2

lOll-llL.l

iiii-90o5

11557 ok

12514.6,9

12229.0
11900.1
13913.0
13297.9
121^95.3
l3k3l}-o6
128160O
13011.6

i)+k9k.ii-
13783.7

96kij..9
92Lj.6.9
11356.9
9583o5
858k.l4.

10103.5
9ki+2.6

10867o5
12086.0

9793.9
11689.7
12311-8.6

10301^,7
6k61^.5
1873.5
1266.7
1|M4.8
5891+.7
7569.1
7720»5
621l8o9
6780,8

7866.7
9kl2.7
10381.6
11215.8
11885.1
10502.8

(c)

Capital
Stock

(d)

9011^-3 06
91269.6
92898.3
Q3865.O

95090.7
95870.0
99830 ok
103885.8
10611+3.7
107512.3
1079kl^o2

iio5ki=5
112997.8

lll|.662.3
117131.5
117289.7
122136.1

132[!.92oU
111.1287. 3
lk2757.3
1L..0169.1[
138622.6

139570,7
lk0597.7
1Il2815o2

11.1.37080 k
ll.k267.8

Ik86k2c3
lk6885.5
ll+8ll].3ok
ll|903k.2
Ii4.7k09.1
11x6957 o 5
lk[i265o9

133577
130021

129k69

129595

127792

126lk3.6

12571+7.7

129933.5

130766.9

127000,8

122080.1

120352c 5

66,02

59.51+
63.93
71.28

6O0O9
61.09

56.95
6lo28

70.29
58.29
69.38
63o99
5)+. 76
60,80
62,30
63.82

60.89
52^1.8
31.98

33.52
1^2,06
k7o25
35.85
36.7k
37. 06
k2.66
1+6, 8Ii.

35.25
k5.30
k7.07
l+i+c71
30,58
9.15
^.71
22,05
28068
33o00
3I0O9
32,00
31.30

3i^.ko
32.18
28,86
27.12
30.12
29,91

(e)

■2L

(f)

(g)
TT

10.81^
10.61
lie 60

12,97

10,95

11.99

11,58

12.08

11.52

llc07

12.89

12.03

11.06

11,72

IO.9I1.

11,09

11»87

10,i].l

6.83

6.1^.8

8.11

6,92

6,15

7.19

6,61

7.56

8,38

6.59

7o96

8,3k
6.91
k.39
1,28
.88
3.33

5c96
i|,89
5.38
6.26

7.25
7.91^
8.83
9o7k
5.73

3.67
3.52

3.31
3.21

3.k3
3.16

3.13
3.15
3. "^8

3.33
3.18
3.21+
3.20
3.23
3.51
3.51
3.19
3.31
3-55
3.87
3o65
i+o6k
I+.29
3.71+
1^,09
3.95
3.81

3.95
3.92

3.8k
k.k7
5.3-

6,5

6,15

5.43

1^,92
[^.2k
3.98
k.96
l|.k3
Il-,09
3.36
2.82
2.k2
2,38
2 06k

1.0372
1.0137
1.0169
l,0k29
1,0278
I0O6I3
1,0167
.9967
1.0579

1.0593
1,1126

I0O685
.985k
1,1063
I0O796
1.1312

I.i3ki
i.oh.51
.9809
I06662
1.1663
i.25ki
1,1679

1.2555
1,2862

1,2909
1.3512
1,2702
1.3950
iai327
loli3lk
1.36I19
1.1536
1.0887
1.I1I70
1.^070
1.571k
1.6592
lc7276

1,7055
1.8078
1,7878

1.7673
1.726k
1.7818
1^7818

209

Year

191+6

kl
1+8

^9
1950

51
52

I960

(a)

Variable
Capital

35167 o8
36906,8
3t^329o8
32020,6
3)4467 « 6
36953.2
37505.6
39202. i|.

35537.5
35755.5
37136.5
36300,6

33501.5
3ii-793.3
3i)-590 = 3

(b)
Surplus-
Value

8397o2

8II1.7.2

107il.8o2

8851 oi|

8i^.9I^.i+
9157.8
8712,11.

8169.6
7703.5
960U.5
8962.5
8i^.95oi4
7553.5
8712o7
81+53.7

(c)

Capital
Stock

(d)

126966.1
1370980!
11+0986. It
Iil.k680o6
Ii.8l08o2

15I}.679.3
1'59670.8

162697*7
161^056.8

I65li|.8c7
171557.9
176559ol
178211.606
17850606
180851. [].

(e)

(f)

(g)
I

23,88
22.08
31o31
27«65
2[|..65
2i!..78
23o23
20 08k
21.68
26.86
2ti.ll+
23.1^0

22,55
25. 01^

2[j.al|l+

6.62

2,91

5.9i+

3.01+

7o62

3.13

6.12

3.5I}-

5.71+

3cl^5

5.92

3.35

5.146

3.45

5.02

3.I1-3

I+.70

3.79

■^.82

3.6k

5.22

3.72

il..8l

3o9i+

it-=3k

l+.io

i|..68

i}..20

7121
7110
9232

9l|J+6
2o0017
2,0236

2,0531+
2,09l|-2

2.1713
2.3382

2.3503
2.39ii.2

2,1+071+
2.1+993
2,5591

Soi:irces:

Column a (Variable Capital): Table VI-1, column a
multiplied by Table C-II, column £.

Column b (Surplus-Value) : Table C-I, column £ less
column a of this table.

Column £ (Capital Stock): Table C-II, column £.

Column d [s' (rate of surplus-value)]: Column b
divided by coliimJi a.

Column s_ [p' (rate of profit)]: Column b divided
by column £,

Column f [Q (organic composition of capital)]:
Colxomn c of this table divided by Table C-I^ colvimn £c

Column £ [^[(net productivity of labor)]: Table C-II,
column f divided by Table C-II, column £,

..^

210

Sources and Methods

In addition to the series taken directly from
Chapter V, the statistical sources used in this chapter
were: John W. Kendrick, Productivity Trends in the U. 3» t
U, S« Bureau of the Census, Census of Manufactures - 1958
and Census of Mineral Industries - 1958 ; and the U. S«
Bureau of Labor Statistics, Bulletin 1312. Employment and
Earnings o

A, Manhours of Productive Labor (Appendix C, Table I)

The basic series of employee manhours worked
annually per industrial Idivision was obtained from un-
published worksheets of the National Bureau of Economic
Research underlying the annual manhour estimates published
in Product Jyity Trends in the U» S.

The percentage of this working time constituting
productive labor was determined in the same way as wages
for productive labor were estimated in the previous chapter:

lo Manufacturing » Manhours worked were allocated
between productive and unproductive labor on the basis of
the ratio of production workers to all employees given by the
1958 Census of Manufactures (I, 1-3) for the years 1899,
190^^-, 1909, 191^, 1919, 1921, 1923, 1925, 1927, 1929, 1933,
1935* 1937* 1939j 19^7, and annually from 19^9 to 195S. For
other years between 1919 and i960 the ratio of productive
laborers to all employees was estimated by Interpolation on

21]

the basis of the ratio of "production workers" to "all employ-
ees" as given in Employment and Earnings , For ..the period
I9OO-I919 it x-7as estimated by linear Interpolation between
the benchmark figures given by the Census o

2e Transportation? Gonmiuni cations and Public
Utilities; Services; and A.gri cultural Ser-^'-ices, Forestry,
and Fisheries , ?'he allocation of manhours derived for
manufacturing was used to estimate manho^^rs of productive
labor worked in these industry groups^

3o Mining o The ratio of "production workers" to
"all employees" given by the 1958 Census of Mineral Industries
(I, 1-k) for the ye«rs 1902, 1909, 1919, 1929, 1939, 195i+>
and 1958 was taken as the basis for allocation of manhours
betvjeen productive and unproductive laboro For other yeara
between 19ij.7 and I960 this ratio was estimated by inter-
polation on the basis of the ratio of "production workers"
to "all employees" given in Employment and Earnings , and
between 1900 and 19i|-6 by interpolation on the basis of the
percentages previously determined for manufacturing.

I4.0 Constructiono For 19il-7-1960 the ratio used
to allocate manhours was taken from the ratio of "construc-
tion v/orkers" to "all employees" given by Employment and
Earnings . This series was extrapolated back to 1900 on
the basis of the percentages previously determined for
manufacturing o

212

B, Capital Stock, Capital Consumption, and the Labor-Content
of the Current Dollar (Appendix C, Table II)

lo Depreciation Rate e The average depreciation
rate established in the previous chapter for each year
(defined as current-dollar capital consumption for the year
divided by the mid-year value of the stock of fixed capital)
was used as the depreciation rate for the same year in this
chapter, since the division of cijrrent gross investment into
groups of differing average life-expectancy, on which the
whole computation of stock and consumption of fixed capital
is based, is not changed by any change in the unit of
measurement (and the consequent implicit price-index) used©

2o Initial Determination of the Labor-Content of
the 1900 Dollar » The current-dollar valuation of aggregate
fixed capital at the beginning of 1900 was taken from the
data of the preceding chapter as a starting point. This
value was expressed in units of one itiillion hours of
socially necessary labor-time by the following methodtl

(a) The initial approximate labor-content of the
1900 dollar was determined by dividiing manhours of productive
labor worked during 1900 by the sum of current-dollar
variable capital and net sxir plus -value.

(b) The current-dollar value of fixed capital at

1, This computation is presented in detail in Exhibit A
appended to this chapter.

213

the start, of 1900 -.as converted into labor units through
multiplying it by the first approximation to the labor-
content of the 1900 dollaro

(c) Depreciation on the initial caoital stock
m labor units was calculated through laultiplication by
that year's depreciation rateo

(d) The second approximation to the labor-content
of the 1900 dollar .;as deterroined through dividing the sum
of man-hours worked, initial capital consumed, and estimated
new capital consumed by the s^-^m of c^ox- rent-dollar variable
capital and^ross surplus-value (i.e., capitalist-sector

gross income)©

(e) App.roxlmate labor-unit current investment was
detemined through multiplying 1900 current-dollar gross
investment by the second approximation to the labor-content

of the 1900 dollaro

(f ) Approximate depreciation on current investment
vas calculated through multiplying l/2 the figure established
in step (e) by the year's depreciation rate,

(g) The third approximation to the labor-content
of the 1900 dollar was determined to six decimal places
through dividing the sum of manhours worked, initial capital
consumed, and new capital consumed (per step f) by current-

dollar gross income «

(h) The initial labor-unit value of fixed capital

.,4-on nr, ^hP basis of the estimated labor-content
■was recomputea on one od^axa uj

214

of the 1900 dollar established by step (g)o

(1) Steps (c) through (h) were repeated until
the fig\:^e established hj step (g) was repeatedo

The labor-unit value of fixed-capital at the end
of 1900 was determined as the algebraic sum of initial
value of fixed capita.l, current gross investment, original
capital consujtied, and new capital consumedo

•3., Annual determination of the labor- content of
the current dollar p For each year the initial labor-unit
value of fixed capital is identically the value of fixed
capital at the end of the previous yearo VFitb this as a
starting point, the program for computing the labor-content
of the current dollar consists of steps (c) through (g)
described above, reiterating steps (e) through (g) until
the figure established in (f) is repeatedo

I4.0 Correction of Bias , Fixed capital in labor-
units and the labor-content of the current dollar were
calculated through 1929. The mid-year fixed capital
estimates for 1925 through 1929 were then reconverted into
"current dollars" through multiplication hj the labor-
content estimate for each year. These estimates were then
compared to the current-dollar estimates of the stock of
fixed capital derived in the previous chapters

It was revealed by this comparison that the 1925-
1929 c-iprent-dollar estimates based on a labor-value index
were approximately l^fo above those based on a use-value

'V I ^ 216

index, although the two totals for 1900 were identical »
Fifteen per cent wae therefore taken ae an indicator of the
approximate "bias in the 1900 current-dollar estimate of

xxji.Su. uapxbaXo

Accordingly, the final calculation of all quantities
in labor-units was carried out according to the procedure
described above, but using as a starting point the previous
estimate of current-dollar fixed capital at the start of
1900 multiplied by 1.15 o

C, Computation of Basic Categories an d Batios

1« Capital Stock o The capital stock for each year
was calculated through multiplying the current-dollar
value of inventories by the labor-content of the current
dollar for that year, and adding this quantity to the mid-
year value of the stock of fixed capital,

2. Variable Capital , Variable Capital for each
year was determined through multiplying current-dollar net
income of productive laborers by the labor-content of the
current dollar for that year.

3. Surplus-Value . Surplus-value for each year
was determined by subtracting labor-unit variable capital
from total manhours of productive labor worked in that year.

k,^ Net Productivity of Labor . The net productiv-
ity of labor for each year wae determined through dividing
the reciprocal of the price-index used in the previous

216

chapter by the labor-content of the current dollar for that
vear. Since 195)+ is the base year of the index, net produc-
tivity of labor for every year is conputed In 1951+ dollars
per manhour o

Evaliia.tion of Data

Since the data used in this chapter are basically
the same as those used in the previous chapter, the
considerations regarding reliability and interpretation of
the data expressed in that chapter (pp. 192-4) apply fully
to the present chapter.

The pattern of results emerging from the current-
dollar calculation is confirmed by computation in units
of socially necessary labor-time. As expected, the basic
trends x-ere shown more strongly than in the previous chapter
- the rate of profit tended to decline by lo62^ per year,
as against a rate of decline of 1,09$^ in the previous
calculation; and the organic composition of capital increased
by 31?^ from 1903 to I960, as against pid Increase over the
sarfie span of 22% shox%m previously o

These results tend strongly to confirm all the
hvDotheses testedo

It should be noted that the tendency of the Marxian
rate of profit to decline, as is to be observed from
Chart VII-1, cannot be viewed as a smooth and sustained

217

process. Within each of two sub-periods, the pre-V/orld-
War I years 1900-1915 and the decade 1920-1929, no
significant over-all fall in this rate took place (apart
from cyclical fluctuations,) though the average rate in
1920-1929 was substantially lower than that of 1900-1915;
and the Great Depression and Second World War resulted in
a recovery of the Marxian rate of profit to well above its
1929 peak. Only within the post-World War II sub -period
(1946-1960) is a sustained falling tendency to be observed,
This pattern cannot entirely be ascribed to the "counter-
acting" factors which, Marx contended, made the fall in
the rate of profit a gradual tendency whose net effect
should be clear only over the long r\in. To a very
significant extent the stepwise fall reflects the demar-
cation between periods of different burdens of taxation
on the U.S. economy. This factor will be discussed in the
following chapter.

218

Exhibit VII-A ; initial DeterminaUon of the Labor-Content

of the 1900 Dollar

Ao Information from basic series:

(1) Depreciation rate « .0592j67

(2) Total Productive Labor 21}., ^65

(mi 11 ions of manhours)

(3) Current Dollar Cross Income .......... o.L|./'U

(millions of dollars)

{[].) Current Dollar Gross Investment o 1|>551

(millions of dollars)

B« Suoplementsry Data:

(5) Current-Dollar Value of Fixed Capital l8,l69.tl.
at start of 1900 (millions of dollars)

'6) Revised Initial Value of Fixed Capital 20,89l+o8
(16,169.1-:- X lol5)

(7) Current Dollar Net Income (from 7,383

Chapter VI, Table Vl-I) (millions of
dollars)

(8) First Estimate of Labor-Content of 3,3272

1900 Dollar [ (2) ^ (7)1

(9) First Estimate of Labor-Value of Fixed 69,521o2 "

Capital, start of 1900 [(6) x (8)]

Co Computation:

Iteration h c d _e_ _f_ _£_

1 69.^21.2 1j,121c7 3oIl06328 5,283.2 lg6«6 3.|4-0^3^8

2 71 a 1 a 218 5 3.1^16777 ^ 299.li- 157.1 3.14-16836
3! 71 39^1 S 232 7 3.bl8<12 5 302.1 lg7.2 3ol|l8<2l+
i 71 k29 [| k 2311.8 3aLl8772 5,302.< 1^7.2 3.1i.l8772
^' 71 k3)I 6 k>35oi 3.ill8808 ^302,6 1^7.2 3.1^8808

t: n:w^ t^Mr?. iXi^m 5,302,6 157.?. 3.i,.i88i9

7. 7i;i!.3i5 K235.2 3.kl88l9 5,302.6 157.2 3oiilS8l9

Year-end value of Fixed Capital - 72,3^5»7

(Explanation of computation procedure given in section III -
B - 2 of this chapter.)

219

Exhibit VII-B ; Calculation of the L abor-Content of the

1901 Dollar

A, Basic Data:

(1) Deoreciatlon rate 0591^17

(2) Total Productive Labor 2^,958

(3) Current-Dollar Gross Income o 8:.675

(ll) Current-Dollar Gross Investment ... 1,606

{^) Value of Fixed Capital at end of ^o oi t^ -7

1900 o I^,3i\-t>*(

B, Computation:

(ci) (5) X (1) )i,279.1j

(dx) [(2) + (c) + (c/25)l i (3) 3.^.263

(ex) (iJ-) ^ (^) 5,502.6

(fx) l/2(e) X (1) 162.7

(Sl) 1(2) -^ (c) + (f)] 1 (3) 3.1^25363

(02) 0-1-) X (s) 5,501.1

(fg) 1/2(62) X (1) 162,7

Year-end vslue of fixed capital - 73,iiO!4..7
(5) - (c) + (§2) - ^-2)

(Explanation of computation procedure is given in section
III - B - 3 of this chapter,)

/^^■■

220

Chapter viii
conclusions

The Confronta t ion of Marx'e Predictions with the Faots

This study has made it clear that the U. So rate
of profit as defined "by Marx, v;hether calculated on a
labor-unit or current-dollar haeis^ has fallen drastically
over the past sixty years e The organic composition of
capital has simultaneously increased, though not in as
pronoimced a wayo The facts of the modern U« So economy
thus tend to confirm, at least in general outline, the
*<lav/" that Marx regarded as basic to his general theory
of capitalist development*

At the same time, however, this study has
revealed another major tendency which Marx definitely
did not predict and x-Jhich contradicts his anticipations;
the decline of the rate of surplus-value from a range of
35-50^ in the 1920 *s (and of 55«70^ in the pre«World War
I period) to a range of 20-2?^ in the last decade*

Marx, of course, excluded a decline in the rate

of Burplus-value as an explanation of a falling rate of

profit!

The falling tendency of the rate of
profit is accompanied by a rising
tendency of the rate of surplus-value,
i.e., in the degree of exploitation of

/'N

221

labor. Nothing is more absurd, there-
fore, than to account for a fall, in the
rate of profit by a rise in the wage-
rate, although exceptionally this may
also be the case*l

The rate of profit sinks not bec-ause
the laborer is less exploited but be-
cause less labor is employed in pro-
portion to the employed capital in
general e^

How drastically this tendency contradicts l-iarx^s
explicit prediction is shown by the fact that the
quantity (the "mass") of surplus-value fell by alraogt
a third between 1929 and i960, from 12,3^9 to 8,i^5^
labor-units (the i960 total, in fact, was less than the
total for any year before 193lS)o Yet Marx repeatedly,
and most forcefully, insists on the "law that a fall in
the 2?ate of profit due to the development of productive-
ness is accompanied by an increase in the mass of pro-
fit"!^

As the process of production and accu-
mulation advances therefore, the mass
of available and appropriated surplus-
labor, and hence the absolute mass of
profit appropriated by the social capi-
tal, must groWo Along with the volume,
however, the same laws of production
and accumulation increase also the value
of the constant capital in a mounting
progression more rapidly than that of
the variable part of capital, invested

le Capital , III, 281,
2o Ibid . , po 288,
3o Ibid . , p. Z6l^,

222

as it is in living lafcor*. Hence, the
same laws produce for the social capi-
tal a growing absolute mass of profit?
and a falling rate of profit o^

The question is therefore posedt to what extent

does the observed fall in the rate of profit reflect the

cause posited by Mars (iees, the increasing organic

composition of capital) as against the explanation Marx

excluded?

A quantitative answer can be indicated on the
basis of the data* Comparing the level of the key
variables (labor-unit basis) in 1905 to their level in
i960 J we see that the rats of profit decreased from
11b 99^ to ^o68^s an annual rate of -1<.72^'; the organic
composition of capital increased from 3«l6 to i!'o20, an
anniial rate of 0«52^ (for its reciprocal, a rate of
-0.52^); ^nd the rate of surplus-value decreased froni
6lo09fa to 2^0^^%, so that the percentage of the working-
day forming surplus-value ( -^ ■ ^." -' i ) decreased at an
annual rate of -1.20^« Thus 30^ of the observed fall
in the rate of profit between these dates is accounted
for by the increase in the organic composition of capital,
and ^Q% is accounted for by the decrease in the rate of
surplus-value »

A falling tendency of the rate of surplus-value

1« Capital « III, 256.

22'3

implies a tendency of hourly real vages to rise more
rapidly than the net productivity of labor, (i.e., in
terms of the model in Chapter V, b, the elasticity of
the real wage vith respect to labor -productivity, has a
value greater than unity.) From the data shown in
Appendix D, Table II, it will be seen that Lhls elasti-
city has kept a fairly uniform level throughout the
period: real wages have tended to increase about 1.3
times as fast as labor net productivity.

It is in this connection that the "unproductive
expenditures," with which Gillman mistakenly attempted
to rescue Marx, have real significance. It is obvious
that the "necessary but unproductive costs'*- of main-
taining the commercial and governmental apparatus have
increased vastly during this century, not only absolutely
but also relatively to the total national product.
These expenses, like the necessary allowance for consump-
tion of fixed capital, must be deducted from the total
goods and services produced by the capitalist sector in
order to determine the net pro duct available for con-
sumption and investment by the capitalists and workers.

It follows that, since an increasing relative
amount of a worker's direct physical product constitutes
constant capital, his net productivi ty grows less rapidly

1. Capital, II, 151.

224

than his gross productivity * This is clearly shown by the
indexes of gross and net labor productivity given in
Appendix D- Table T* The index of real wages, which in-
creases faster than the index of net productivity, grows
(after 1929) more slowly than the index of gross productiv-
ity« The lag of net productivity behind gross productivity
thus more than accounts! for the actual observed decline in
the rate of surplus-valae<»

The existence of such a lag, indeed ^ is required
by Marx's model of capitalist development o Marx explicitly
predicts that the organic composition of capital will tend
to increase, and that the rate of turnover of the stock of
capital (i.e,, the efficiency with which this stock is
utilized) will also tend to increase. It follows that the
relative share of the value of the gross product consisting
of constant capital must tend over time to increase a

Questions necessarily arise, however, if this
argument is applied not only to the expansion of distri-
butional and administrative overhead costs required by
the increasing sophistication and complexity of the pro-
ductive apparatus, but also to the weight of taxation.
The increase in the tax biirden during the past half -century
has been largely, though not entirely, caused by the
increase in direct and indirect military expenditures.
Such expenditures, of co\irse, have political causes, and
cannot be treated as simple reflections of changes within

225

the capitalist economic system. •'•

To what extent do these "politically determined"
costs account for the actual decline in the rates of
surplus-value and profit? If not for them, might not the
rate of surplus -value even have increased enough to
counteract the increased organic composition of capital and
thereby totally to prevent a fall in the rate of profit?

In order to reply to these questions it was
necessary to isolate the effect of national, state, and
loca:l taxes upon the rate of surplus -value, and thereby
upon the rate of profit. This was done for every year by
expanding the net totals of variable capital and (labor-
unit depreciation) surplus-value by the amounts previously
deducted as direct personal and corporate taxes. The ratio
between these two aggregates gave a new "expanded rate of
surplus-value gross of taxes" which could then be applied
to the total manhours of productive labor and organic
composition of capital established in Chapter VII to produce
an "expanded total sxorplus -value gross of taxes" and an
"expanded rate of profit gross of taxes" for each yearo
The degree of expansion indicates the effect of changes in
the structure and rates of taxation upon the amount and
rate of profit.

1. In the strict Marxian sense, it is true, they ultimately
do reflect changes in the economic base. Marxists have con-
tended that in the last analysis «ars among capitaj.xsu
states are fought for basically economic objectives, and
that this is particularly so in the "epoch of imperialism.

226

The resxilts of this computation (presented in
Appendix D, Table IV and Charts I and II) can be s\aimned up
in a single pair of figures: in 1905 the "expanded rate of
profit gross of taxes" was 12,88^ (11.99?& on the previous
basis,) and in 1960 the "expanded rate of profit gross of
taxes" was 7.95% (4.88?^ on the previous basis.) Thus over
this span the "expanded rate of profit gross of taxes" fell
at an annual rate of .88^ , as against an annual rate of
decrease of 1.72^ for the observed Marxian rate of profit.
Comparison of the two figures shows that the increasing tax
burden is sufficient explanation for an annual rate of
decrease of .84^ in the rate of profit, or nearly 50^ of
the observed rate of decrease, ^

The effect of taxation is therefore far from a
full explanation for the fall in the rate of profit » It is,
ho^vever, a vary substantial partial explanation for the
fall in the rate of svirplus -value, which, we have seen,
accounts for 70^ of the observed decline in the Marxian

profit-rate.

Marx's explanation of the falling tendency of
the rate of profit as a result of a rising organic com-

1, A inaxin»:;in estimate of this effect is gxven by comparxson
of the regression coefficient for the "expanded rate of
profit gross of taxes", -.00619, to the regression
coefficient for the observed profit-rate derived m Chapter
VII -.01619. This would indicate that increased taxation
r^an' account for almost 62^ of the observed rate of decline.

227

position of capital thus appears, on the basis of the
data for the entire period, to be at least partially
adequate: even apart from the unforeseen decrease in
the rate of surplus -value, the rate of profit would still
have fallen significantly over the period, and for the
reason Marx specified.

2. . The Phas es, of 20t h-Gentury U,S. Economic Development

The problem of explaining the falling rate of
profit appears in a somevhat different light if the
general trend of development is analyzed in terms of a
division into separate periods.

It is clear at first glance that, in terms of
the variables relevant to this study, the 20th-century
U.S. economy has gone through at least three distinct
periods: the pre- 1929 era; the great depression and
second ¥orld >rar; and the post-var period.

It can be contended that the years 1930-19^5
constitute a qualitative break in American history: that
the society emerging from the second World ¥ar was psy-
chologically, sociologically, and economically of a dif-
ferent sort from the one that crashed in 1929. I myself

1. A case can be made out for treating the pre-Vorld Var I
years as a separate period. However justified this may be,
it is not best to do so in the present context, partially
for considerations of the precision of the data (cf . supra
ch, VI, p. 192) but mainly since the division would not
reflect a drastic break in the same sense as the others
do .

228

would accept this view only with grave reservations (it
is, for instance, obviously false in regard to the U.S.
Congress and dubious at best in regard to the stock
market and the American League). In terms of Marxian
economics, however, the years of depression and war
brought truly decisive changes at basic points.

(a) In the -most spectacular sense the years
1930-1945 were marked by " slaughtering of the values of
capitals ." Between 1930 and 1945 the capital stock fell
from 149 billion to 120 billion labor units, a net dis-
investment of some 20% (in only one other year of the
entire period, 1921, was there any disinvestment at all) .
At the same time this was a period of rapid technological
and scientific advance, so that in 19^5 much of the re-
maining capital stock was already obsolescent.

(b) The depression and. war years saw the forma-
tion and consolidation of mass industrial unions in the
basic sectors of American industry, with a corresponding
change in the institutional structure of the labor market.
At the same time the government budget and tax system
emerged as a major economic fact (i.e., as a major factor
restraining the growth of net labor -productivity) .

In comparison to 1929> the situation in 1946 (so
far as our statistics are concerned) was marked by two
major changes:

- the rate of sxirplus- value had fallen by virtu-

229

ally 50^ (from 47^ to 2h%)

- the organic composition of capital as computed
had fallen by ahout 25% (from 3.84 to 2.91).

If the post- 1945 period is judged on its ovn,
certain sharp differences from the pre-¥ar epoch become
apparent. In the first place, after 1946 the falling
tendency of the rate of surplus -value is completely
arrested: fluctuations continue vithin a relatively
narrow range, hut without discernible trend. (The fact
that this stability has been accompanied by steadily
growing unemployment, however, indicates that in a full-
employment situation the balance might well swing to the
side of labor.)

Secondly, technological progress has been ex-
tremely capital-intensive, as indicated by the value of
1.153 (as against I.8II in the pre-war period) obtained
for u in the equation ffs aQ""^ (Cf . ch. VII, p.203) . Con-
sequently the organic composition of capital increased
from 1946 to i960 by 45^ (from 2.91 to 4.20).

The result has been an over -a 11 fall in the rate
of profit at a pace much faster than the trend for the
whole 1900-1960 period. This is, in fact, virtually an
"ultra-Marxian" picture - a situation in which the or-
ganic composition of capital is rising rapidly and in
which the "counteracting causes" are mainly inoperative.

There can at this point be no conclusive answer

230

to the question whether this picture will continue to
apply even for the next decade: not only because 15
years is too short a period to support a firm prediction,
but also because there is no assurance that this is in-
deed a "normal" period in its ovn right, and not merely
a phase of recovery to some much longer-term trend.

If, however, we accept tentatively the hypothesis
that the post-war parameters will continue to apply in
the next decade, it is difficult to escape the stag-
nationist implications of the Marxian theory, since a
1.% annual growth rate of the capital stock (the 1953-
1960 average) permits less than a 2% growth rate of net
product when u = 1.153. Whether or not this proves to
be the case depends to a large degree on political and
social factors that we cannot go into here. In the purely
economic sense, however (i.e., abstracting from changes in
the institutional context), the Marxian model leaves vir-
tually no room for a real acceleration in the growth rate.

•^. Bearing on the Marxian System

What, then, is the bearing of this study upon the
Marxian theoretical struct^ire as a whole?

It is plain, despite the scope, power, and basic
clarity of his thought, that jMarx left his system of
economic analysis in a crude and unfinished form, that
many vital concepts were poorly defined, and that essential
parts of his model were not developed beyond the stage of

231

artificial and unrealistic schemata. The endeavor to
make an empirical test of one of the major "laws" of this
model, therefore, required the clarification and refor-
mulation of these aspects of Marx's doctrine.

If this "book has made a theoretical contribution,
it has not done so through development of any new theories
on a Marxian basis, or through a new critique of Marx.
V/hat has been accomplished has been:

(1) To state or restate the basic categories of
Marx's system in a ^ay which establishes both their co-
herence with each other and their identifiability to em-
pirically knowable economic magnitudes.

(2) To validate the "law of the falling tendency
of the rate of profit" both as a vital part of I-Iarx's
model of economic development under capitalism and as a
logically correct and necessary deduction from the basic
premises of the Marxian system,

^5^ To demons trate practically that the Marxian
model can be tested by the facts of the U.S. economy =

The data developed through this test, as pre-
sented in the previous chapters and in this conclusion,
speak for themselves. They show clearly that Marx was no
infallible prophet, that certain of his predictions proved
to be invalid. But they also confirm that Marx was
correct on the issues he regarded as decisive: the
rising tendency of the organic composition of capital

232

and the falling tendency of the rate of profit.

Confirmation on this vital score is not in any
sense "confirmation" of the Marxian economic theory as
a whole - something which is in any case conceivable
only through the integration of vast amounts of post-
Marxian theory into the Marxian structure. ¥ha.t this
study has shown is not that Marx is "right" or "wrong"
the point is, that he is relevant .

233

APPENDIX A

ANAL!fSIS OF THE BORTKIEWICZ-SVffiEZY CRITICISM
OF MARX'S SOIUTION TO THE "TRANSFORMATION PROBLEM"

234

APPENDIX A

This solution to the "transfomation problem" was
of considerable theoretical importance to Marx because it
inalntained the equality of value and price in aggregate
terms x^hile showing that prices of production are ultimately
dependent upon values and must change in a determinate way
with changes in value (|| = ^)* It has, however, been
criticized as being inconsistent with other essential
aspects of the Marxian sjrstemo

This criticism was developed by Bortkiewicz^ together
with an alternative solution, and both his criticism and
"solution" were presented and endorsed by Sweezy in "The
Theory of Capitalist Deveiopmento"

The criticism, as Sweezy states it, is iiiat "ths
Marxian itb thod of transformation results in a violation of
tte equLlibriuin of simple reproduction, "2 The Marxian model
of "simple reproduction", of coiorse, requires that in an
economy divided into two "Departments," Dept, I producing
means of production and Dept. II means of cons^jm^ption, the
constant capital consumed in Dept. II be exactly replaced

1 "On the Correction of y.arz's Fundamental Theoretical
Construction in the Third Volume of Capital ," reprinted as
an appendix to Hilferding, opo cit,

2o Sweezy, opo clt« , pe lli^«

235

by the new product (variable capital plus surplus-value)
in Dept, I so that the total capital stock neither in-
creases nor decreases: Cp =v-+s^« If^ however, the
organic composition of capital is different in the two
lines, then _s is unequal to £^, and consequently v^ + p,
will be unequal to £p © Marx's error, according to Sweezy,
stems from the fact that

In his price scheme the capitalists'
outlays on constant and variable capital
are left exactly as they were in the value
scheme: in other words, the constant
capital and the variable capital used in
production are still expressed in value
term So Outputs, on the other hand, are
expressed in price terms, 1

If this criticism is valid it has grave implica-
tions: both the uniform rate of profit and the relation-
ship of siraple reproduction are necessary features of the
basic Marxian macro-economic equilibrium model, and if
the two are contradictory the systai as a whole fails to
meet the elementary test of internal consistencyo More-
over, if the contradiction can be resolved only by allowing
the sum of prices of production to diverge from the sum
of values this would negate the essential meaning of the
Marxian "law of value" itself, knocking the central prop

1« Sweezy, op. cito , p. Il5<

236

out frorn under the entire structure.^

in one sense the Sweezy-Bortkie.Ticz criticism can
be ansv^ered quite simply. Marx expressed the relation-
ship bet..een value and price of production as a function
of the relationship bet.;een the organic composition of

1 -ince it co-cludes with a sum of prices unequal to the
sint? vaiues;"the Sweezy-Eor tkie.icz "f l-\f°f //.^'^
^T^fnrt no sol^^tion but rather the proclamation of the
i?sence 0° any so?Stion to the problem with which Marx was
concprnedl Without entering upon a detailed analysis of the
Bo?tkIewicz-Sweezy method, it should be noted that, though
nre tending to generality, it applies only under the
SDOSsibll condition of the absence of fixed capital and
equal periods of tur-nover for the variable and constant
portions of the circulating capital. Moreover its entire
approach, which separates out a third Department producing
oSlT "luiury goods^ which then are treated as the numeraire
for the vhole system (on the ground that gold is produced
in this department) is quite invalid and leads to the
conclusion, ridiculous in Marxist terms but which Sweezy
actually considers an important insight, that 'the^rate of
profit depends only upon the conditions of production
existing in those industries which contribute direcly or
indirectly to the m^ke-up of reel wages. Conditions
existing in industries catering solely to capitalists con-
sumption are relevant only in so far as they influence
conditions in the wage-goods industry (p. l^M-Jo

In any case gold, as it comes from the refiner, is never
anv sort of "luxury good": it is partly raw material,
constan t capital , to be used in the production of luxury
goods " "workers consumer goods" and indus-crial materials
of maiy sortsj the rest constitutes means of circulation.
In this latter capacity it can be treated as a "department
of production" in itself, as Marx suggests in Volume II
(though the moment the domestic monetary unit is made incon-
vertible the production of gold becomes merely one line of
industry among many) bat at the level of abstraction involved
in the discission of prices of production the numeraire is
simply irrelevant: all that is necessary is that prices and
values be calculated in the same units , which is precisely
what Bortkiewicz and Sweesy do not do, . ^ n 4.^,,

These are secondary objections. The fundamental thing
wT'one with the Sweezy-Bortkiewicz m.ethod, as we will^see in _
the following pages, is tha.t it fails to understand the Marxian
category value as it is concretised in relation to price of
productiono

237

capital characteristic of each specific industry, and the
organic composition of the social capital as a whole.
Svjeezy and Bortkie-wicz, on the other hand, pose the
problem in terms, not of specific industries, hut of
entire "Departments of Production."

But, although Marx at one point ^ does use an
arithmetic illustration involving a higher organic composi-
tion in Department I, what reason is there to expect the
organic composition of capital to be different in the two
departments? Differences among industries rest on the
specific technical characteristics of each industry, in
a modern economy em.bracing hundreds or thousands of
distinguishable "industrieso" On what is based the
supposed difference between the two departments of produc-
tion, each of which is an enormously aggregative entity?

Most industries, it must be remembered, belong
simultaneously to both . departments, since their classifica-
tion is not alorig technical lines but by whether they sell
to individual final consumers or to intermediary enterprises
Accordingly, to assert the existence of a characteristic
difference between the organic compositions in Departments
I and II involves the implicit assumption of a substantial
correlation, positive or negative, between organic
composition of capital in an industry and the percentage

le Capital, II, 5,96 <

258

of its output sold to individual final consumers a

The existence in reality of such a correlation is
most improbable, since it is evident that even among
industries entirely within Department I there are to be
found whole groups with relatively labor-intensive technol-
ogy (machine-tool production, for instance,) alongside
extremely capital-intensive sections like primary metal-lurgyc
There is thus every reason to make the opposite assumption,
that of a zero correlation between organic composition
and departmental classification.

G-iven this assumption it follows that the average
organic composition is virtually equal in the two depart-
ments. In this case, of course, the product of each
department would have a total price equal to its total
value, and all relationships expressed in average (i.e.,
aggregative) terms between the departments would be absolute-
ly unaltered. The equilibriixm of simple reproduction would
not be disturbed, and the system as a whole would be

internally consistent o

Is the foregoing a satisfactory reply to these
theoretical criticisms? For most practical purposes it
undoubtedly is, at least as far as the basic Marxian
aggregates are concernedo However, from a theoretical
standpoint it is inadequate for two reasons: first of all,
even if it is most improbable that organic composition
should be correlated with departmental classification, it

239

is still theoretically possible, so that if the Marxian
system is generally valid It must also hold in this
special case: and second, every specific industry requires
different material elements for its constant and variabl-^
capital, so that it by no means follows that if in the
aggregate these coirmiodities are sold at their values this
will be true for the industry in question. Accordingly
the expansion of the simple-reproduction scheme into an
input-output type table for the entire economy is
essentially a development from the two sector model in
which values and prices of production are unequal in each

department.

For these reasons, then, it is necessary to show
directly the applicability of Marx's method of transforming
values into prices of production to the two sector model
with systematically differing organic compositions in the
two departments. To do this it is necessary to be clear
on the exact significance of the category "value" in this

model.

As we saw, the direct objection to Marx's trans-
formation formula was that in going from the value of a
commodity, c 4- v + s, to its price of production, c + v + p,
it allows only for the ch.ange between s and £, leaving c

and V the same,

Marx, for his part, was well aware that "Since the
price of production may vary from the value of a commodity.

240

it follows that the cost-price of a commodity containing
this price of production may also stand above or below
that portion of its total value which is formed by the
value of the means of production [including labor-power^
s.m,] consumed by ito"^ He did not, however, consider this
to contradict his transformation formula"^ as expressed in
the statement that: '''A capitalist selling his commodities
at their price of production recovers money in proportion
to the value of the capital consumed in their production
and secures profits in proportion to the aliquot part
which his capital represents in the total social capitalo"3

These two citations, however, certainly seem
contradictory, .and Marx nowhere attempts a specific
resolution of this contradiction. It is nevertheless
possible to demonstrate that the contradiction is merely
apparent, and to do so in a manner implicitly indicated
by Marx's formulations themselves.

The key is to be found in the fact that in his
general formulation Marx speaks of " the value of the capital
consumed in . , . production" ("die Vfertgrosse des in der

1. Capital , III, 19I4-.

2o Cf. Capital , III, 2i].2, where Marx specifically reaffirms
the proposition that all comjnodities produced by capitals
of average composition will have prices of production equaj.
to their values,

3o Capital , III, l87o

241

Produktion von ihm verzehrten Kapitals"-^) while in dis-
cussing the supposed secondary deviation from value he
refers to "the value of the means of production consumed"
C^der Wert der in sie eingehenden Produktionsmittel"^) o
The crucial point is to understand that these are different
quantities.

As we saw at the outset, for Marx " Capital is not
a thing " - it is a social relationshipo The "things"
through which this relationship bet'ween people is expressed
are defined specifically as capital only by that role -
they are not capital in themselves.

It is here that Marx's differentiation between the
two primary forms of circulation, C-M-C and M-C-M', takes
on central importancsc In C-M-G value is passive ^ a mere
"equivalent form," reflecting the immanent attributes of
commodities as products of social laboro For that reason
this form of circulation is quite Independent of the mode
of production, as valid for a primitive as for a capitalist
society.

On the contrary, value is " the active factor " in
the M-C-M' circuit, in which the physical object is merely
"a disguised mode of existence" of " value itself ." M-C-M'
is "the general formula for capital " precisely because the

lo Das Kapital, III, iSIj.
2, Ibid. , p. 190.

242

capitalist mode of production is essentially characterized
by tHe self -expansion of value. Hence the "value" of a
thing has a radically different meaning depending on
whether it is as a use-value part of the social final
product, the end of a C=.M-C process; or x.hether it is
an intermediary stage in an M-G-M' circuit: in other v^ords,
whether it is viewed as coimnodity or as capital o

The essential error of Sweezy and Bortkiewicz is that
when they ask "how much value does this capital good trans-
fer to the product?" they answer "its own value as deter-
mined at the time of its production." But in this way they
sLmply negate its character as capital - they treat the
production of value as a relationship among things, not

a.mong people.

As constant or variable capital the "capital good"
according to Marx is nothing but the "disguised form" of
"value itselfo" At the extremes of the M-G-M' process
"value itself" stands out in its general form, as pure
money. The "capital good," as a disguise for the money,
can transfer to its product only the value for Trjhic h it
stands , only the value-equivalent of its actual monetary
cost to the capitalist who uses it* If he paid for it at
more or less than its value this, as Marx states, is of
absolutely no consequence to him so long as it really cost
the prevailing market price. The difference between the
value created by its production and its price of production

243

has already been transferred to other capitalists through
the average rate of profit. Henceforth, "however scurvy
.it may look," it is really "in faith and truth money . . o
and a wonderful means whereby out of money to make more

moneyo"

Accordingly, in the Marxian formulae c + v + s
and c + v + p, c and v are indeed value expressions: they
express the value of the capital consuraed, and Sweezy is
dead wrong to take Marx to task for treating them as such.
This does not, of course, imply that they are independe-nt
of the transformation of values into prices of production,
that is, of capitalist production itself I On the contrary,
they, and the quantitative relationships based upon them,
must be regarded as determined by the total process of
capitalist production, a process in which the formation of
prices of production is an essential parte

On the basis of this approach, identifying "cost
price" to the value of capital consumed, it is now possible
to test Marx's transformation method in the case of a two-
sector economy in which each department is treated as a
separate industry having its own characteristic organic
composition of capital.

The general model"'- of simple reproduction in this

1 It is simple, not expanded, reproduction which represents
the o-eneral case of macro-economic eauilibrium. Expanded
reproduction along an equilibriim path requires merely alter-
ation of equations III and VII in accordance with the unique
rate of growth of income and capital stock. In this case

244

case, with)!-^, Xg* ^'' ^"^^ * ^^ parameters, consists of

jquations in seven variables (Z^, %£, J?]^* ^2*' Tl^ ^2* ®-^

seven

I qAiVi (1 + s')t + v^d + ^is') = Zi0i

II Q;j2V2(1 + s')t + VgCl +/^2^') = ^2^2
(determination of prices of production in the two

departments)

III y^d + s'Ai) = Q^2^2^1 + s')t
(simple reproduction)

V ri + sM (1 + Q^-t) = z,
1 i j-

V V2(l + s') (1 + Q)i2t) = ^2
(determination of values in the tvjo departments)

VI 1j^0i + Z2^2 = ^1 "^ ^-2

(aggregate identity between value and price of production)

VII Zt + Z2 = P_i

(total value of gross product determined and constant)

By substitution and elimination this reduces to
three equations:

la Q)ii(l + s')t + (1 + -^is') = (1 + sM (1 + Q.\t)0j_

lia (1 ^^.-.oM . (1 ->->>l3M d-^Aps') , (i^;^^3,)(i

t0.^2(l ■*• s') 1 .

Ilia (1 + sMd + QAit)j^i + (1 + )\is')(l + 'C^)^2 =
(1 + sMd + Q>iit) + (1 + ^isMCi + -^)

(Qj_=: Q2), Equation III x^ould be: vi(l + sMi) -
Q?l2V2(l + s')t + Qr(v3_ + V2) d + s')*

245

Solving for 0i and 02 ^® £®^ ^^^ ex'pression already

derived, _____XI^II
^^ 1 + QXit

Once the numerical value of Q is determined the
values of the other variables are easily obtained. Thfl
total result is a solution to the "transformation problem"
in v'hich the prices of production are derived in the way
indicated by Marx; in which the equilibrium of simple
reproduction is maintained both in terms of price and of
physical assets; and in which the overall total of prices
is equal to the total of values.

The significance of this solution, like that of
any equilibri^jm B^odel, is largely formal: it shows that
the Marxian categories are self-consistent, that the formal
system contains no internal inconsistency, no logical
contradiction* It is therefore justified to treat observable
economic aggregates as representatives of the corresponding
Marxian categories, even though most individual price
relationships deviate from tbeir equilibrium levels. This
is of particular importance for the rate of profit which
has meaning only as a relationship between aggregates^

246

APPENDIX B

SUPPIEI^NTARY TO CHAPTER VI

Note: Sources for these Tables are descrlbecl in the
section of Chapter VI on Sources and Methods .

247

TABIE B - I
PRICE INUEX (195U = 100)

Year Index 2®H l£^

1900 28o20

1901 28«20

1902 29.ii?

A.-P1JJ

31.26

190U 30.6U

1905 30,6lt

1906 31.87

1907 35.71

1908 31.87

1909 31.87

1910 33.71

1911 33.71

1912 36.16

1913 35.55
191U 36.06

1915 36*U8

1916 39.16

1917 U6.05

1918 5U.0U

1919 62 0x8

1920 72o02

1921 6k.21

1922 60.17

1923 61.26
192U 6lJ*3

1925 63.03

1926 63.53

1927 62.36

1928 61,60

1929 61.60

1930

59oOO

1931

52.60

1932

U6.50

1933

liit,30

I93I1

li7.60

1935

U806O

1936

U9.10

1937

50o90

1938

U9.80

1939

li9.20

19ii0

U9.70

19U1

53.10

19i+2

59o5o

191*3

65.00

19ljli

68^60

19U5

71.00

19U6

76.50

19ii7

81;»60

19ii8

89.50

19lt9

680 70

1950

89.90

1951

96.00

1952

98.00

1953

99.00

195U

100.00

1955

100.1iO

1956

102,20

1^7

105-10

1958

107.30

1959

108o50

I960

110,10

Sources described in Chapter VI, Section HI, (p. 177)

248

Table B-H, Capital stock, I900-I96O (Millions of GwsQnt Dollars)

ygar

■^aT

Producer

Durable

EgtiilBBant

TBT

BusiZBSS

structures

■~T5r- —

Fu9l and
Mineral
DeTOlepnsnt
^penditurss

JdT

luvsatoriss

JiT-

Total

1900

1
2

■a

h
5
6

7
8
9
1910
1
2
3
k
5
6

7
8
9
1920
1
2
3
h
5
6
7
8
o

1930

9
19W)

5238.5
552Uo7
5906*1
65U6,1
6625.7
6890.9
7625.9
86ii6cl
8Uh7o6
8529.9

9it89.7
101*62,5
10761.8
1120li.5

II501.U
126ii7.U

16553*ii

21262.6

25811.8

30I472.9

27175.1

25252.6

26233.li

27098.ii

281i21,3

29378.9

29iaj7.?

29611.5

30589.U

30021.1

26U70.8

22U51.0

20527.5

2l055o5

tfi.^x7.i>

22081,0

2ii059.0
2h2kka
2/a82,7
255U1;.5

12576.3
13070.5
13631.1
2ii783o9
ll*726«U
1U993.S
I6003oli
17U59*9
16960.9
17385oU

19255»8
21014,3
21I6I1.8
21896<»0

221*30.9
2l4U79,0
293U9*9
31*910.8
lt05U3.1

IJ285i.8
lj0532.U
Ij2102.6
U3390.5
U5851.U
lt?86»..?
Ii8801o6
1*991*6.1*
51766.7
51131.2
1*6083.1*
1*0305.7
38008.1

39399a
39512.1*
39^3.8
li051*9.2
39519.6
38760.0
39lOi..8

522.8
51*8.6

571**9
631.8

61*0.9
661.1

712.5

786ili

773.1

800.9

877«8

905.7

1010c2

1036.2

1100.3

1151.9

1301*.J

1670.8

2152.1*

2656.1

■JVlC. A

3121*. 3
3029.2
3219.8
3361*.!*
5591.8
3788.6
3851.0
3875.2

3953.7
3860.6
31*31.9
3018.2
2895.7
3066c 2

3171.5
329l».lt
3590,6
3698sU
380i*.0
1*011,6

5339
5370
5590
5951
5815
5891*
6U55
7053
721D

731*7
7832

8053
8268
8888

ns^

96U5
11865
I6087
19960
2U01*7

fsn\.£.r>

25382
23362
25683
2701*1
27570

^0X00

27992

27531*
27909

261*71
22106
17832
16506
17692
16556
2031*ij
22699
221*77
21960
23632

23677

2i*511*

25708

27913

27808

281*1*0

3079?

3391*5

33392

3itf)63

36820

37701*

1*0785

ia85l

1*31*50

1»1*729

50296

63661

78306

93058

xyjofyx

9853^

92176

97239

100891*

1051*3U

109220

110092

110967

111*219

1111*81*

98092

83598

77937

81313

82557

65023

90898

89939

88707

92293

Table B-II. (continued)

249

(a)

(b)

Cc)

(d)

Ce)

19kl

29312.1i

U2102,7

UU82.5

28273

10M71

33808,5

U719it.8

5152.1

32952

119108

36195 •ii

50619»5

5680.3

3li239

126698

37882,8

52211.5

6128.7

3U306

130529

li052Uo2

53251.6

6566,8

3k23h

131^577

ii6950.i;

58565.5

7316,6

U0930

153762

57931.it

67921.7

8375.1

51923

166151

68753.1

75000.8

9300,5

59026

212080

7li086,0

77091.6

9729.6

59531

220U38

1950

81025.1

8o837o2

10ii30.3

63297

235590

91298.6

8986U,8

ll885.i;

7U618

267667

98935-9

95872.1i

12i|81.2

80391

287680

1051^28.7

I0lit06.6

U056,5

61990

302882

111203.1

10737U.5

152ii5.ii

82225

3l60i;8

5: -:

r;1163i|1.9

ll,3361io9

16!;69.7

8505U

331251

125U55.1

122131.2

18958.8

92899

35851jU

137689.9

133518.6

19752,1

9835U

389315

11|5672,5

lii3520.7

20957.8

98398

koBSh?

11|9878.7

151330.8

2185Uo8

100657

U23721

1960

156535.1

160237.5

22871.5

105972

iai56l6

250

n^ableB-III. Cai^ital Cons-umption. 1900-1950 (Millions of Current

Dollars)

(a)

(1))

(c)

Fuel and

(d)

Producer

Mineral

Dursole

Business

Development

year

3nui-Dment

Structure s

Sx'oenditures

Total

1900

540.9

513.3

33.0

1087.2

564.3

553.5

54.6

1132.4

604.3

556.4

35.5

1197,0

674.3

603.4

59.9

1317.5

580.0

501.1

40.7

1321.8

708.0

612.0

41.9

1361.9

785.9

653.2

45.1

1484.3

894.0

712.6

49.9

1656.5

878.7

592.3

49,1

1620.1

896.5

709.6

51.2

1657.3

1910

980.4

769.6

56.2

1805.2

1011.3

785.7

58.1

xouo.i

. 1118.5

859.0

64.6

2042.1

1158.0

853.9

67.0

2088.9

1217.1

895.7

71.7

2182.5

1259.5

915.5

75.3

2250.4

1449.9

999.1

35.6

2534.5

1914.0

1198.0

110.5

3222.3

2525.4

1424.9

143.2

4094.5

3105.9

1654.8

178.4

4940.1

1920

3660.4

1940.6

224.5

5825.6

3232.5

1749.1

214.4

5195.0

2978.2

1654.4

209. 3

4841.9

3123.9

1718.5

223.3

5066.2

3252.6

1771.0

234.9

5258.5

3468.5

1871.5

252.4

5592.4

3511.7

1953.7

268.1

5833.5

3554.8

1991.9

273. B

5900.5

3660.5

2038.6

276.3

5975.4

3825.4

2112.9

282.6

6220.9

1930

3766.3

2087.0

276.8

6130.1

3275.5

1881.0

245.5

5403.0

2721.5

1645.1

216.9

4585.5

2445.5

1551.4

208.4

4206.3

2509.6

1612.2

221.1

4342.9

2572.9

1612.8

229.5

4415.2

2745.0

1604.2

239.4

4588.5

3063.4

1655.1

262.5

4981.6

3093.8

1613.0

272.0

4978.8

3084.7

1532.0

281.2

4947.9

1940

3294.8

1596.1

297.5

5188.4

251

Ta'ble

B-r-III. (continued)

year

(a)

(b)

(c)

(d)

1941

S829.3

1718.5

333.2

5881.0

4292.6

1926.3

282.8

5601.7

4329.5

2066.1

420.9

6816.5

4364.4

2131.1

453.9

6949.4

4649.0

2173.5

487.2

7309.7

5605.8

2390.4

544.3

8540.5

7295.9

2772.7

624.6

10683.2

8922.9

3061.3

695.7

12679.9

9714.4

3146,6

730 c 8

13591.8

I95C

10587,2

3299.5

786.9

14673.6

12155.7

3668.0

900.8

16724.5

15087.5

3913.2

988.5

17989.2

13805.1

4139.0

1075.7

19019.8

14411.3

4382.8

1172.6

19966.7

14989.1

4627.1

1274.4

20890.6

16253.6

4984.9

1401.2

22639.7

1793912

5449.7

1536.8

24925.7

18829. 8

5858.0

1633.3

26321.1

19156.9

6176.8

1705.6

27039.3

1960

19935.5

6540.3

1787.4

28263.2

252

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260

Table BeVII. (continued) Variable Capital, 1929-1960

(g)
Gross

Tax Eate

Total

(h)

Eff.

IDotal

3ff.

Net

Variable

Fed.

Tax

Vsjiable

year

CaiDital

Inc.

Ratio

Eate

Paid

Capital

1929

2S156

.01

2.09

.0002

23151

1950

19471

,01

2.21

.0002

19467

15182

.01

3.06

.0003

15177

11002

.05

4.40

.0022

10978

10829

.04

3.09

.0012

10816

13604

.03

2.68

.0008

13593

15067

2.28

.0009

15053

17715

.05

2.00

.0010

17697

20996

.06

1.70

.0010

20975

16837

.12

1.75

,0021

16802

18215

:io

1.98

.0020

18179

1940

20637

.23

1.91

.0044

20546

28343

1.25

1.63

.0206

583

27760

39655

3.58

1.28

.0459

1819

37836

50000

6.64

1.08

.0717

3587

46413

51763

6.58

1.08

.0711

3678

48085

47700

6.37

1.08

.0686

3272

44428

48859

5.25

1.09

.0573

2799

46060

57163

5.99

1.09

.0654

3741

53422

62197

4.49

1.11

.0500

3107

59090

58162

4.37

1.15

.0504

2930

55232

1950

65814

5.03

1.14

^0576

3790

62024

77369

6.49

1.11

.0721

5582

71787

82068

7.29

1.10

.0804

6595

75473

88640

7.51

1.11

7362

81278

83533

6.75

1.13

.0763

6370

77163

91120

6.95

1.13

.0788

7182

83938

9770S

7.73

1.14

.0879

8587

S9116

100225

7.76

1.14

.0885

3880

91345

94808

7.55

1.16

.0872

8270

86538

104275

8.21

1.16

.0952

8823

94350

1960

1072&8

7=85

1.17

.0916

9829

97459

■«*

261

APPENDIX C
TABLES SUPPLEMENTARY TO CHAPTER VII

Note: Sources for these Tables are described in. the
section of Chapter VI on Sources and Methods .

262

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266

APPENDIX D
TABIES SUPPIEIvEWTARY TO CHAPTER VIII

267

Table D«I Producti'sity and Wage Indexes

(1929 a» 100)

(a)

(b)

(c)

Labor

Hourly

Labor

Net-

Seal

Gross-

year

Productivity

wage

Produetivity

1900

72cU

6U,1

6ii.5

70e8

65,2

63,a

TleO

63.7

62.5

72o8

62.5

62.9

71.7

65.9

6i».6

7U.1

67.6

65.9

71.0

66.5

6U.2

69,6

63.il

62.2

73.8

63.8

67.7

73.9

68.7

68.3

1?10

77.7

T0.9

69.2

7lv.6

66.9

6?.li

68«8

65.U

61.8

77o2

70.6

69.6

75.i(.

e8.3

70.6

79.0

70,9

73.1;

79.2

72.1j

70.9

72*9

70.1i

70.U

68«5

76,3

70.9

7h.h

82.0

75.1

1920

81«li

8Ue3

?6.2

87o5

Bl^U

87.0

81.5

88.3

8U.9

87.6

9lio3

85.9

8$vB

96.3

91.7

90a

92.9

90.9

9U*3

9h.$

9it.l

86o7

96olt

91,7

97.1*

98.6

99.lt

100.0

lOOoO

1930

99.9

101.6

106.0

9Si3

107.3

118.6

80.5

108.5

120.3

76.0

105.7

110.9

98*9

319*2

125.0

105.2

120.2

125.6

109.7

121.3

121*.2

115.8

129.9

126.3

120.6

13U.ii

Ill9e7

119.0

133.1;

iU7.0

19U0

126.2

138.1

152.0

268

Table D-I (contdnusd)

gear (a) (b) (c)

im.

12lt.8

138.8

11j7o3

i23.i|

UiOo8

137.1

120«5

139.1;

131.0

12U.lj

lli0.5

133.0

12UoU

lbO.8

1?in.2

119,5

lia.9

lli3.1

119.1}

1U3.9

ll*3,i»

13U.2

150.lt

155.1

135«7

156oli

165.5

1950

139.7

16U.9

176,0

iijl.z

166,5

177.7

lit3.3

171.1

181.7

li|6.2

177.9

186,6

151.6

183.2

198,2

163.2

189.2

210.7

16U.0

19koh

215.8

167.1

199.2

227.5

168.0

201.7

238.0

nk.k

205.2

2kh*7

1960

178.6

211,1

253.7

Howccest

(a)s Tabls vn=I

(b) s Table B-VU, coltann h divided ty tbc product of pries

index (Table B-I) and total laan-hotirs troriced (Table C=I,
column h)

index (Tfliblt B=I) and total man-hours worked (Table C-I.
column h)

269

TABLE S-IJ

Hates of Increase of ITet-Productivity and Hourly Real V/ages
i'Jet-Productivity (fo pet annuGi)

•fco

issy

ii?^-U

J-bbU

frto

1905

1.28

1.52

1.60

1929

2.12

1.87

1940

1.74

Eoiirly Eea,l ¥age (^ per annum)

to 1929 1940 1960

from

1905

1.5S

2.04

2.07

1929

2.93

2.41

1940

2.12

b (Elasticity of hourly real v;age v/ith respect to net-
productivity)

to 1929 1940 1960

from

1905

1.27

1.34

1.29

1929

1.39

1.29

1940

1.22

Source: Tatle D-I

270

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Sources:

■<
4

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a
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- Columns (a) through (e): See Chapter VI, section on
Sources and Methods .

- Column (g): for I929-I96O, "based on U.S. Income and Output ,
Tahle 1-12 5 for 1900-19?3, hased on Kendrick, Productivity

Trends in tne u . b . ,

Tahle A-II-B.

272

lable D-IV.

Expand-

ed (Gross of Taxes

) Bates of

Profit and Surplu

Value,

1900-1960 (Millions of Laljor

-Units)

(a)

(b)

(c)

Expanded

(d)

Expansion
Of

s«

Surplus-

year

?alue

Falue

1900

74.4

11.63

10489

721

67.6

11,45

10461

773

71.9

12,63

11749

788

79.0

13.74

12902

727

68o3

11.81

11237

823

68.7

12,88

12352

841

64.3

12.49

12455

898

68.8

12.95

13472

925

79.3

12.35

13095

866

66.8

12.01

12926

1026

1910

77.6

13,74

14843

930

72.3

12,96

14313

1015

62.4

12.00

13561

1066

68.4

12.5?

14426

991

70.7

11.79

iS3S3

1007

72.2

11.94

13994

S52

69.4

12.85

15703

1209

82.3

13.63

18062

4278

65.8

11.18

15801

6156

55.9

9.28

13223

3976

1920

57.4

10.00

14000

2643

62.1

8.25

11438

1854

50.6

7.83

10932

2348

49.6

8.88

12485

2381

50.8

8.24

11764

2321

57,0

9.19

13194

2326

50.8

9.93

14324

2238

48.3

8.25

12253

2459

60.0

9.57

14062

2372

61.3

9.90

14GG1

2??. 2

1930

59.2

8.32

12408

2103

46.9

5.97

8806

2341

27.5

3v25

4730

2906

24.6

3.20

4618

3351

40,8

5.34

7133

2688

47.2

6.52

8489

2594

54,4

8.30

10738

3169

49.2

8,29

10744

3023

49.9

6,71

8584

2335

52,0

7.72

9728

2947

1940

61.2

9.29

11579

3812

273

Table D-IV.

(continued)

year

(a)

(■b)

(c)

(d)

1941

72.9

12.56

16312

6899

59,4

14.54

19008

8626

68.2

16.74

21293

10077

65.2

16.50

20233

8348

63,2

14.66

17656

7153

54.0

12.00

15291

6894

•7

49. S

10,86

14868

6721

57.0

11,60

16363

5615

49.3

9.32

13488

4537

1950

57.4

10.58

15681

7187

59.5

11.13

17199

8041

51.6

9.86

15714

7002

47.5

9.39

15254

7084

46.5

8.36

13707

6003

55.2

9.78

16148

6543

51.3

9.17

15720

6757

50.2

8.48

14962

6467

48.0

7.47

13302

5748

52.2

8.37

14923

6210

1960

50.2

7.95

14377

5923

274

Chart D-Io

Expanded (Gross of Taxes) and Actual
(Wet of Taxes) Rates of Profit and
Svirplus -Value p 1900-1960 (Labor-
Unit Basis)

275

Chart D-IIe

Expanded (Gross of Taxes) and Actual
(Net of Taxes) Rates of Profit,
Peacetime Peak Years, 1903-1960
(Labor-Unit Basis)

Sr ml - l-oftarlt h mfc
2(:yclr3x lOtuihcinch

rt^ fU7 if>i /ta /fti ii0

v\ 276

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277

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